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The role of institutions in price correction: evidence from intraday noise trading in Taiwan

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  • Chun-I Lee
  • Robin K. Chou
  • Edward S. Hsieh
  • Kimberly Gleason

Abstract

This article investigates the role of institutional investors in the Taiwanese equity markets in the resolution of noise trading, which we define as the deviation of a stock's price from its fundamental value within a trading day. We use a sample of stocks traded on the Taiwan Stock Exchange (TWSE) that experience extreme price movements characterized by price limit hits between March 2003 and March 2007, and assess the noise trading component of the price movements. Specifically, we examine whether overreaction occurs in the Taiwanese equity markets, and whether noise trading disrupts the price discovery process. We shed light on whether the unique features of the retail trading segment of the market slows the speed of correction following an overreaction, and relate these findings to those from studies of the US market. Our results show that noise trading in the Taiwanese equity markets is prevalent, and that a protracted correction process takes place. Further, we document a disruptive role of institutional investors, namely, that in contrast to the US equity markets, they appear to move the market away from equilibrium, and slow the speed of correction following an overreaction.

Suggested Citation

  • Chun-I Lee & Robin K. Chou & Edward S. Hsieh & Kimberly Gleason, 2012. "The role of institutions in price correction: evidence from intraday noise trading in Taiwan," Applied Financial Economics, Taylor & Francis Journals, vol. 22(24), pages 2009-2025, December.
  • Handle: RePEc:taf:apfiec:v:22:y:2012:i:24:p:2009-2025
    DOI: 10.1080/09603107.2012.690846
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    File URL: http://hdl.handle.net/10.1080/09603107.2012.690846
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    References listed on IDEAS

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    1. Brad M. Barber & Yi-Tsung Lee & Yu-Jane Liu & Terrance Odean, 2007. "Is the Aggregate Investor Reluctant to Realise Losses? Evidence from Taiwan," European Financial Management, European Financial Management Association, vol. 13(3), pages 423-447.
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