Individual Investor Trading in Leverage Products - Risk Appetite and Positioning Around Earnings Announcements

37 Pages Posted: 26 Feb 2013 Last revised: 5 Aug 2013

See all articles by Sebastian Schroff

Sebastian Schroff

University of Hohenheim

Stephan Meyer

Karlsruhe Institute of Technology

Hans-Peter Burghof

University of Hohenheim

Date Written: August 5, 2013

Abstract

We study the trading behavior of individual investors in leverage bank-issued products around earnings announcements. The trading activity increases substantially around earnings announcements. Aggregated individual investor trading is strongly correlated, both pre- and post event. We find intense aggregate positive positioning ahead of earnings announcements, irrespective of the direction of the subsequent earnings surprise. Thus, individual investors are subject to an "optimism bias". The risk appetite of individual investors increases in the run-up to earnings announcements. We find that neither pre-event risk appetite nor pre-event imbalances can be attributed to informed trading. We attribute the increased risk appetite to investor overconfidence. Overall, individual investor trading in leverage products is not particularly skillful.

Keywords: Individual Investors, Leverage Products, Earnings Announcements, Risk Preferences, Imbalances

JEL Classification: G10, G14

Suggested Citation

Schroff, Sebastian and Meyer, Stephan and Burghof, Hans-Peter, Individual Investor Trading in Leverage Products - Risk Appetite and Positioning Around Earnings Announcements (August 5, 2013). Available at SSRN: https://ssrn.com/abstract=2223957 or http://dx.doi.org/10.2139/ssrn.2223957

Sebastian Schroff (Contact Author)

University of Hohenheim ( email )

Germany

Stephan Meyer

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Hans-Peter Burghof

University of Hohenheim ( email )

Schloss Hohenheim
510F
Stuttgart, 70599
Germany
+49 711 459 22900 (Phone)
+49 711 459 23448 (Fax)

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