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The trading response of individual investors to local bankruptcies

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  • Laudenbach, Christine
  • Loos, Benjamin
  • Pirschel, Jenny
  • Wohlfart, Johannes

Abstract

We examine how adverse local experiences that are uninformative of future returns affect households’ investment behavior in the short term. Using data from a German online brokerage and a survey, we show that retail investors sharply reduce risk taking in response to nearby firm bankruptcies. Adjustments in risk taking occur through immediate and transitory increases in trading, and work through more pessimistic expectations about aggregate stock returns and increased risk aversion. Changes in background risks or wealth effects cannot explain our findings. Extrapolation from local experiences to aggregate expectations is inconsistent with optimal use of full or limited information.

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  • Laudenbach, Christine & Loos, Benjamin & Pirschel, Jenny & Wohlfart, Johannes, 2021. "The trading response of individual investors to local bankruptcies," Journal of Financial Economics, Elsevier, vol. 142(2), pages 928-953.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:2:p:928-953
    DOI: 10.1016/j.jfineco.2021.06.033
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    More about this item

    Keywords

    Individual investors; Risk taking; Trading; Experiences;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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