The Effects of the Stocks Performance Relative to the Index Performance, on Traders’ Behavior, Case Study of NYSE

Abstract:     
This study investigates the correlation of the relative status of a stock in respect to the whole market, i.e. whether a stock has under or outperformed the index in a period of time. Indeed we have proposed a model which considers the relative performance of each stock as a signal to buy or sell the stock. The model parameters have been computed for components of 3 indexes: S&P100, Dow Jones Industrial Average, and PHLX gold/silver sector. Historical data ranges as far as available in our database until June 2011. We observe that, most of the time, this correlation is negative and there is a negative feedback in trading behavior of traders. Next we investigate the effect of considering volume of trading in each day on this correlation, by using volume weighted least square method. We observe that the correlation is more notable when we consider volume of trading. Also we investigate the asymmetry of traders’ behavior in response to positive relative status good news and negative relative status bad news. The result shows that the negative feedback in traders’ behavior is weaker when a stock has underperformed the whole market i.e. has a negative relative status. Also we categorize the stocks in each index into different categories according to their capital markets and other characteristics, and then we investigate the correlation and asymmetry factor for each category.

Number of Pages in PDF File: 28

Keywords: Behavioral Finance, Relative Performance, ML Estimation, Regression

JEL Classification: F10

working papers series