Uncertainty and Trading Strategies of Institutional Investors
56 Pages Posted: 20 Mar 2009
Date Written: March 18, 2009
We present evidence that uncertainty affects trading strategies of institutional investors. Using 20 years of holdings data of U.S. institutional investors, we document that institutional investors hold high uncertainty stocks for shorter periods and they earn lower profits from trading these stocks. Furthermore, we find that investors tend to sell winner stocks with high uncertainty quicker. This trading pattern, however, does not hold for loser stocks. The aggregate effect of this asymmetry is that the disposition effect intensifies as uncertainty increases. We argue that these effects are consistent with the hypothesis that institutional investors exhibit stronger behavioral biases when trading stocks with high uncertainty.
Keywords: Institutional investors, Trading volume, Overconfidence, Disposition effect, Uncertainty, Ambiguity, Investment strategies
JEL Classification: G11, G12, G15, F30
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