Abstract

http://ssrn.com/abstract=869827
 
 

References (63)



 
 

Citations (47)



 


 



Do Noise Traders Move Markets?


Brad M. Barber


University of California, Davis

Terrance Odean


University of California, Berkeley - Haas School of Business

Ning Zhu


China Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management

September 2006

EFA 2006 Zurich Meetings Paper

Abstract:     
We study the trading behavior of individual investors using the Trade and Quotes (TAQ) and Institute for the Study of Security Markets (ISSM) transaction data over the period 1983 to 2001. We document four results: (1) Order imbalance based on buyer- and sellerinitiated small trades from the TAQ/ISSM data correlates well with the order imbalance based on trades of individual investors from brokerage firm data. This indicates trade size is a reasonable proxy for the trading of individual investors. (2) Order imbalance based on TAQ/ISSM data indicates strong herding by individual investors. Individual investors predominantly buy (sell) the same stocks as each other contemporaneously. Furthermore, they predominantly buy (sell) the same stocks one week (month) as they did the previous week (month). (3) When measured over one year, the imbalance between purchases and sales of each stock by individual investors forecasts cross-sectional stock returns the subsequent year. Stocks heavily bought by individuals one year underperform stocks heavily sold by 4.4 percentage points in the following year. For stocks for which it is most difficult to arbitrage mispricings, the spread in returns between stocks bought and stocks sold is 13.1 percentage points the following year. (4) Over shorter periods such as a week or a month, a different pattern emerges. Stocks heavily bought by individual investors one week earn strong returns in the subsequent week, while stocks heavily sold one week earn poor returns in the subsequent week. This pattern persists for a total of three to four weeks and then reverses for the subsequent several weeks. In addition to examining the ability of small trades to forecast returns, we also look at the predictive value of large trades. In striking contrast to our small trade results, we find that stocks heavily purchased with large trades one week earn poor returns in the subsequent week, while stocks heavily sold one week earn strong returns in the subsequent week.

Number of Pages in PDF File: 47

Keywords: Behavioral Finance, Asset Pricing, Market Efficiency

JEL Classification: G13, G15

working papers series


Download This Paper

Date posted: December 15, 2005  

Suggested Citation

Barber, Brad M. and Odean, Terrance and Zhu, Ning, Do Noise Traders Move Markets? (September 2006). EFA 2006 Zurich Meetings Paper. Available at SSRN: http://ssrn.com/abstract=869827 or http://dx.doi.org/10.2139/ssrn.869827

Contact Information

Brad M. Barber (Contact Author)
University of California, Davis ( email )
Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)
Terrance Odean
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building
Berkeley, CA 94720
United States
510-642-6767 (Phone)
510-666-2561 (Fax)
HOME PAGE: http://www.haas.berkeley.edu/faculty/odean.html
Ning Zhu
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

Yale School of Management ( email )
135 Prospect Street
Box 208200
New Haven, CT 06520-8200
United States
HOME PAGE: http://pantheon.yale.edu/~nz26/
University of California, Davis - Graduate School of Management ( email )
One Shields Avenue
Davis, CA 95616
United States
530-752-3871 (Phone)
530-752-2924 (Fax)
HOME PAGE: http://www.gsm.ucdavis.edu/Faculty/Zhu/
Feedback to SSRN


Paper statistics
Abstract Views: 11,618
Downloads: 2,822
Download Rank: 1,792
References:  63
Citations:  47

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo3 in 0.641 seconds