Bubbles and Buyers: Are Individual Investors the Culprits?

Abstract

Which investor class causes stock price anomalies? Are individual investors responsible for prices that deviate from fundamental value? We address these questions in the context of a specific anomaly, that of stock price 'bubbles.' Using data from the Australian Stock Exchange Clearinghouse register, we investigate the Granger-causality between investor category trading and 'bubble' stock prices and display the relative trading volume of the investor categories. We conclude that individual investors, the category commonly assumed to be susceptible to cognitive errors in trading decisions, are not responsible for stock mispricings. Individual investor volume is dwarfed by that of institutions. Nor are individual investors the marginal investor - as a category, their trades are negatively correlated with price changes.

Keywords: retail investor, institutional investor, bubble, anomaly, cognitive error

JEL Classification: G14, G15, G19, G23, G24