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Stock return anomalies and individual investors in the Korean stock market

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  • Jang, Jeewon

Abstract

I find a negative cross-sectional relation between the probability of future price crashes and subsequent returns in the Korean stock market, substantially due to the overpricing of stocks with a high probability of crashes. Using precise information on retail trading in the Korean stock market, I also find that stocks with a high crash probability have a relatively high proportion of retail trading. Moreover, the negative relation between the probability of crashes and stock returns is much stronger in stocks traded more heavily by retail investors. However, I cannot find a negative relation between the probability of jackpot payoffs and subsequent returns in Korea, unlike in the United States, even among stocks with a high proportion of retail trading. Both portfolio- and firm-level evidence on the crash effect suggests that stocks with a higher retail trading proportion are more likely to be overpriced, as expected from the limits to arbitrage literature.

Suggested Citation

  • Jang, Jeewon, 2017. "Stock return anomalies and individual investors in the Korean stock market," Pacific-Basin Finance Journal, Elsevier, vol. 46(PA), pages 141-157.
    • Handle: RePEc:eee:pacfin:v:46:y:2017:i:pa:p:141-157
    DOI: 10.1016/j.pacfin.2017.09.002
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    Cited by:

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    5. Fan, Ruixin & Xiong, Xiong & Gao, Ya, 2021. "Can the probability of extreme returns be the basis for profitable portfolios? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 76(C).

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    More about this item

    Keywords

    Anomalies; Crash; Overpricing; Retail investors; Limits to arbitrage;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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