The Effect of Investor Category Trading Imbalances on Stock Returns
35 Pages Posted: 23 Aug 2007
Date Written: May 2007
Trading is the mechanism of the economist's 'invisible hand;' the means by which price discovery occurs. We use daily shareholdings data from the Australian equities clearinghouse to investigate the impact of the trading imbalances of investor categories on stock returns. Our evidence does not contradict the behavioural finance assumption that the trading of individual investors contributes to price discovery. Furthermore, we find that, while the trading of all investor categories Granger-causes returns, returns Granger-cause trading only for the individual investor category. That is, in the short term of up to one month, only individual investors engage in feedback trading.
Keywords: trading imbalance, retail investor, feedback trading
JEL Classification: G14, G19
Suggested Citation: Suggested Citation
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