Do Investors Put Their Money Where Their Mouth Is? Stock Market Expectations and Investing Behavior

46 Pages Posted: 18 Mar 2011 Last revised: 21 Aug 2014

See all articles by Christoph Merkle

Christoph Merkle

Kuehne Logistics University

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: February 20, 2013

Abstract

To understand how real investors use their beliefs and preferences in investing decisions, we examine a panel survey of self-directed online investors at a UK bank. The survey asks for return expectations, risk expectations, and risk tolerance of these investors in three-month intervals between 2008 and 2010. We combine the survey data with investors’ actual trading data and portfolio holdings. We find that investor beliefs have little predictive power for immediate trading behavior. The exception is a positive effect of increases in return expectation on buying activity. Portfolio risk levels and changes are more systematically related to return and risk expectations. In line with financial theory, risk taking increases with return expectations and decreases with risk expectations. In response to their expectations, investors also adjust the riskiness of assets they trade.

Keywords: Expectations, Beliefs, Risk, Return, Trading Behavior, Portfolio Choice

JEL Classification: D81, G02, G11

Suggested Citation

Merkle, Christoph and Weber, Martin, Do Investors Put Their Money Where Their Mouth Is? Stock Market Expectations and Investing Behavior (February 20, 2013). Journal of Banking and Finance, Vol. 46, pp. 372-386.. Available at SSRN: https://ssrn.com/abstract=1786456 or http://dx.doi.org/10.2139/ssrn.1786456

Christoph Merkle (Contact Author)

Kuehne Logistics University ( email )

Großer Grasbrook 17
Hamburg, 20457
Germany
+49(0)40-328707-234 (Phone)

HOME PAGE: http://www.the-klu.org

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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