Can Margin Traders Predict Future Stock Returns in Japan?

Pacific-Basin Finance Journal, Vol. 17, pp. 41–57, 2009

17 Pages Posted: 10 Apr 2012

See all articles by Hideaki Kiyoshi Kato

Hideaki Kiyoshi Kato

Nagoya University - Graduate School of Economics

Takehide Hirose

affiliation not provided to SSRN

Marc Bremer

Nanzan University

Date Written: November 1, 2006

Abstract

A growing body of literature suggests that investor sentiment affects stock prices both at the firm level and at the market level. This study examines the relationship between investor behavior and stock returns focusing on Japanese margin transactions using weekly data from 1994 to 2003. Margin trading is dominated by individual investors in Japan. In analysis at the firm level, we find a significant cross-sectional relationship between margin buying and stock returns. Both market-level and firm-level analyses show that margin buying traders follow herding behavior. They seem to follow positive feedback trading behavior for small-firm stocks and negative feedback trading behavior for large firm stocks. Our results show that information about margin buying helps predict future stock returns, especially for small-firm stocks at short horizons. The predictive power does not diminish even after controlling for firm size and liquidity.

Suggested Citation

Kato, Hideaki K. and Hirose, Takehide and Bremer, Marc, Can Margin Traders Predict Future Stock Returns in Japan? (November 1, 2006). Pacific-Basin Finance Journal, Vol. 17, pp. 41–57, 2009. Available at SSRN: https://ssrn.com/abstract=2037633

Hideaki K. Kato (Contact Author)

Nagoya University - Graduate School of Economics ( email )

1 Furo-cho
Chikusa-ku
Nagoya 464-8601, 464-8601
Japan
+81-52-789-4928 (Phone)
+81-52-789-4928 (Fax)

Takehide Hirose

affiliation not provided to SSRN ( email )

Marc Bremer

Nanzan University ( email )

18 Yamazato-cho
Showa-ku
Nagoya 466
Japan
81 052 832-3111 (Phone)
81 052 832-2104 (Fax)

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