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Can margin traders predict future stock returns in Japan?

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  • Hirose, Takehide
  • Kato, Hideaki Kiyoshi
  • Bremer, Marc

Abstract

A growing body of literature suggests that investor sentiment affects stock prices both at the firm level and at the market level. This study examines the relationship between investor behavior and stock returns focusing on Japanese margin transactions using weekly data from 1994 to 2003. Margin trading is dominated by individual investors in Japan. In analysis at the firm level, we find a significant cross-sectional relationship between margin buying and stock returns. Both market-level and firm-level analyses show that margin buying traders follow herding behavior. They seem to follow positive feedback trading behavior for small-firm stocks and negative feedback trading behavior for large firm stocks. Our results show that information about margin buying helps predict future stock returns, especially for small-firm stocks at short horizons. The predictive power does not diminish even after controlling for firm size and liquidity.

Suggested Citation

  • Hirose, Takehide & Kato, Hideaki Kiyoshi & Bremer, Marc, 2009. "Can margin traders predict future stock returns in Japan?," Pacific-Basin Finance Journal, Elsevier, vol. 17(1), pages 41-57, January.
  • Handle: RePEc:eee:pacfin:v:17:y:2009:i:1:p:41-57
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Takahashi, Hidetomo & Xu, Peng, 2016. "Trading activities of short-sellers around index deletions: Evidence from the Nikkei 225," Journal of Financial Markets, Elsevier, vol. 27(C), pages 132-146.
    2. Zhao, Yan & Cheng, Lee-Young & Chang, Chong-Chuo & Ni, Cih-Ying, 2013. "Short sales, margin purchases and bid–ask spreads," Pacific-Basin Finance Journal, Elsevier, vol. 24(C), pages 199-220.
    3. Chang, Eric C. & Luo, Yan & Ren, Jinjuan, 2014. "Short-selling, margin-trading, and price efficiency: Evidence from the Chinese market," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 411-424.
    4. Duong, Truong X. & Huszár, Zsuzsa R. & Yamada, Takeshi, 2015. "The costs and benefits of short sale disclosure," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 124-139.
    5. Mehmet Balcilar & Riza Demirer & Talat Ulussever, 2016. "Does speculation in the oil market drive investor herding in net exporting nations?," Working Papers 15-29, Eastern Mediterranean University, Department of Economics.
    6. Hung, Weifeng & Huang, Sheng-Tang & Lu, Chia-Chi & Liu, Nathan, 2015. "Trading behavior and stock returns in Japan," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 200-212.
    7. Lee, Bong-Soo & Ko, Kwangsoo, 2016. "Are Japanese margin buyers informed?," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 47-53.
    8. repec:eee:eneeco:v:65:y:2017:i:c:p:50-63 is not listed on IDEAS
    9. Chen, Jun & Kadapakkam, Palani-Rajan & Yang, Ting, 2016. "Short selling, margin trading, and the incorporation of new information into prices," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 1-17.
    10. Charteris, Ailie & Chau, Frankie & Gavriilidis, Konstantinos & Kallinterakis, Vasileios, 2014. "Premiums, discounts and feedback trading: Evidence from emerging markets' ETFs," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 80-89.
    11. Joyce Hsieh & Chien-Chung Nieh, 2010. "An overview of Asian equity markets," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 24(2), pages 19-51, November.
    12. repec:wsi:rpbfmp:v:17:y:2014:i:03:n:s0219091514500192 is not listed on IDEAS

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