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Liquidity provision and informed trading by individual investors

Author

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  • Tian, Xiao
  • Do, Binh
  • Duong, Huu Nhan
  • Kalev, Petko S.

Abstract

This study examines the relation between individual investor trading and future stock returns in the Australian equity market. We find that the net trading of Australian individual investors is positively related to future returns. We show that this association is driven by individual investors who play the role as liquidity providers. We further document that the proliferation of algorithmic trading in recent years dampens the relation between individual trading and future returns. Finally, we present evidence that the net individual trading prior to earnings announcements predicts post-announcement returns. This prediction, however, is only observed for individual investors using full-service brokers.

Suggested Citation

  • Tian, Xiao & Do, Binh & Duong, Huu Nhan & Kalev, Petko S., 2015. "Liquidity provision and informed trading by individual investors," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 143-162.
  • Handle: RePEc:eee:pacfin:v:35:y:2015:i:pa:p:143-162
    DOI: 10.1016/j.pacfin.2014.11.005
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    References listed on IDEAS

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    1. repec:eee:pacfin:v:45:y:2017:i:c:p:68-81 is not listed on IDEAS
    2. repec:eee:riibaf:v:41:y:2017:i:c:p:220-234 is not listed on IDEAS
    3. Balachandran, Balasingham & Faff, Robert, 2015. "Corporate governance, firm value and risk: Past, present, and future," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 1-12.
    4. Lim, Kian-Ping & Thian, Tze-Chung & Hooy, Chee-Wooi, 2015. "Corporate Shareholdings and the Liquidity of Malaysian Stocks: Investor Heterogeneity, Trading Account Types and the Underlying Channels," MPRA Paper 67602, University Library of Munich, Germany.
    5. repec:eee:riibaf:v:42:y:2017:i:c:p:496-508 is not listed on IDEAS

    More about this item

    Keywords

    Individual investors; Future stock returns; Algorithmic trading; Liquidity provision; Informed trading;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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