Buying and Selling Behavior of Individual Investors in Option-Like Securities

DBW - Die Betriebswirtschaft, Vol. 72, pp. 409-426

34 Pages Posted: 3 Jun 2012 Last revised: 26 May 2014

See all articles by Philipp Schmitz

Philipp Schmitz

University of Applied Sciences Aachen

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: May 8, 2012

Abstract

We analyze the trading behavior of individual investors in option-like securities, namely bankissued warrants, and thus expand the growing literature of investors behavior to a new kind of securities. A unique data set from a large German discount broker gives us the opportunity to analyze the trading behavior of 1,454 investors, making 89,958 transactions in 6,724 warrants on 397 underlyings. In different logit regression, we make use of the facts that investors can speculate on rising and falling prices of the underlying with call and put warrants and that we also have information about the stock portfolios of the investors. We report several facts about the trading behavior of individual investors in warrants that are consistent with the literature on the behavior of individual investors in the stock market. The warrant investors buy calls and sell puts if the price of the underlying has decreased over the past trading days and they sell calls and buy puts if the price of the underlying has increased. That means, the investors follow negative feedback trading strategies in all four trading categories observed. In addition, we find strong evidence for the disposition effect for call as well as put warrants, which is reversed in December. The trading behavior is also influenced if the underlying reaches some exceptionally prices, e.g. highs, lows or the strike price. We show that hedging, as one natural candidate to buy puts, does not play an important role in the market for bank-issued warrants.

Keywords: Individual Investors, Trading Behavior, Negative Feedback Trading, Disposition Effect, Bank-issued Warrants

JEL Classification: G1

Suggested Citation

Schmitz, Philipp and Weber, Martin, Buying and Selling Behavior of Individual Investors in Option-Like Securities (May 8, 2012). DBW - Die Betriebswirtschaft, Vol. 72, pp. 409-426. Available at SSRN: https://ssrn.com/abstract=2055088 or http://dx.doi.org/10.2139/ssrn.2055088

Philipp Schmitz (Contact Author)

University of Applied Sciences Aachen ( email )

No Address Available
Germany

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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