The Effect of Investor Category Trading Imbalances on Stock Returns

Colwell, David B.; Henker, Julia; Walter, Terry S.

doi:10.2139/ssrn.1009025

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The Effect of Investor Category Trading Imbalances on Stock Returns

35 Pages Posted: 23 Aug 2007

See all articles by David B. Colwell

David B. Colwell

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Terry S. Walter

University of Sydney; University of Technology, Sydney - School of Finance and Economics; Financial Research Network (FIRN)

Date Written: May 2007

Abstract

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

Colwell, David B. and Henker, Julia and Walter, Terry Stirling, The Effect of Investor Category Trading Imbalances on Stock Returns (May 2007). Available at SSRN: https://ssrn.com/abstract=1009025 or http://dx.doi.org/10.2139/ssrn.1009025