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Assessing Investor Belief: An Analysis of Trading for Sustainable Growth of Stock Markets

Author

Listed:
  • Yan Han

    (School of Humanities and Social Science, Beijing Institute of Technology, Beijing 100081, China)

  • Xue-Feng Shao

    (Business School, University La Trobe Sydney Campus, Sydney, NSW 2000, Australia)

  • Xin Cui

    (Business School, University of International Business and Economics, Beijing 100029, China)

  • Xiao-Guang Yue

    (Rattanakosin International College of Creative Entrepreneurship, Rajamangala University of Technology Rattanakosin, Nakon Patom 73170, Thailand)

  • Kelvin Joseph Bwalya

    (School of Consumer Intelligence and Information System, University of Johannesburg, APK Campus, Johannesburg 2006, South Africa)

  • Otilia Manta

    (Romanian Academy, Center for Financial and Monetary Research-Victor Slăvescu, 010071 Bucharest, Romania)

Abstract

Investors’ beliefs are the driving force behind the trading of stocks and, hence, sustainable stock returns. Although investors’ beliefs are usually unobservable, this study develops a new approach to estimate investors beliefs. Following well-established rational learning and market microstructure models, it is assumed that informed traders submit market orders according to their beliefs, whereas market makers/uninformed traders make Bayesian inferences about the informed traders’ private signals after observing the total order flows. By fitting intraday transaction data to this model, we can estimate the daily belief uncertainties of informed and uninformed investors; this estimation is performed on S&P 500 stocks. The belief parameters estimated by this approach have incremental explanatory power to bid-ask spreads. The findings show that market makers’ belief uncertainty plays a more important role in determining sustainable stock returns than informed traders’. Implications of these findings include: (a) the larger market maker group is influencing the market trends; (b) this dominant group is making decisions based on diverse types of data; and (c) increased understanding of the diversity of belief parameters may facilitate strategies to enhance sustainable returns, however, stock trading is still significantly influenced by emotive factors worthy of further research.

Suggested Citation

  • Yan Han & Xue-Feng Shao & Xin Cui & Xiao-Guang Yue & Kelvin Joseph Bwalya & Otilia Manta, 2019. "Assessing Investor Belief: An Analysis of Trading for Sustainable Growth of Stock Markets," Sustainability, MDPI, vol. 11(20), pages 1-18, October.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:20:p:5600-:d:275421
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