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The impact of information-based familiarity on the stock market

Author

Listed:
  • Dehua Shen

    (Department of Economics, Universitat Jaume I, Castellón, Spain)

  • Xiao Li

    (College of Management and Economics, Tianjin University, China)

  • Andrea Teglio

    (Department of Economics, Universitat Jaume I, Castellón, Spain)

  • Wei Zhang

    (College of Management and Economics, Tianjin University, China)

Abstract

Since the familiarity-based investment plays an important role in portfolio construction, mounting literature has investigated the nature of familiarity and summarized two contradicting hypotheses: information-based trading and behavioral heuristic explanation. However, existing studies leave blank for this issue in Chinese stock market. In this paper, we prove that the familiarity-based investment is driven by information through utilizing the “Approach Your Company, Know Your Investment” activities organized by Shenzhen Stock Exchange. In particular, the empirical results show that investors holding stocks with high degrees of familiarity earn more abnormal returns compared with those investing in stocks with less familiarity and such discrepancy remains in the subsequent 50 trading days. Moreover, we observe that the information-based familiarity results in significant decreases in both liquidity and volatility. All these findings not only complement the existing literature through providing alternative evidence for the nature of familiarity in developing markets, but also have implications for both individual investors and policy makers.

Suggested Citation

  • Dehua Shen & Xiao Li & Andrea Teglio & Wei Zhang, 2016. "The impact of information-based familiarity on the stock market," Working Papers 2016/08, Economics Department, Universitat Jaume I, Castellón (Spain).
    • Handle: RePEc:jau:wpaper:2016/08
    as

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    References listed on IDEAS

    as
    1. Zhang, Wei & Shen, Dehua & Zhang, Yongjie & Xiong, Xiong, 2013. "Open source information, investor attention, and asset pricing," Economic Modelling, Elsevier, vol. 33(C), pages 613-619.
    2. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    3. Baltzer, Markus & Stolper, Oscar & Walter, Andreas, 2011. "Home-field advantage or a matter of ambiguity aversion? Local bias among German individual investors," Discussion Paper Series 1: Economic Studies 2011,23, Deutsche Bundesbank.
    4. Zhang, Yongjie & Song, Weixin & Shen, Dehua & Zhang, Wei, 2016. "Market reaction to internet news: Information diffusion and price pressure," Economic Modelling, Elsevier, vol. 56(C), pages 43-49.
    5. Mark S. Seasholes & Ning Zhu, 2010. "Individual Investors and Local Bias," Journal of Finance, American Finance Association, vol. 65(5), pages 1987-2010, October.
    6. Gehrig, Thomas, 1993. " An Information Based Explanation of the Domestic Bias in International Equity Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 97-109.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Familiarity; Information advantages; Home bias; Psychological bias; Liquidity and volatility;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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