'Other People’s Money': The Trading Performance of Household Investors vs. Delegated Money Managers

58 Pages Posted: 2 Mar 2015 Last revised: 27 Feb 2017

See all articles by Wei Lu

Wei Lu

The University of New South Wales; Commonwealth Bank of Australia - Realindex Investments

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

P. Joakim Westerholm

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: October 26, 2016

Abstract

We utilize seventeen years of comprehensive daily portfolio and trading data identified at the individual investor level, to analyze the relative trading performance of the entire universe of households, all domestic financial institutions and all foreign institutions in the Finnish market. We introduce a new methodology we dub the “holding-period-invariant” (HPI) portfolio approach. The conventional calendar-time portfolio approach imposes a heroic assumption that all investors mechanically realize (i.e., trade) their portfolio at specified intervals corresponding to an assumed horizon. By contrast, our methodology is free of such bias and allows for the endogenous nature of investment timing decisions made by numerous informed households (and, for that matter, domestic institutions). Adopting a random informationless trading benchmark, we find that the households who choose to trade for themselves are economically and statistically superior traders, achieving an impressive internal rate of return of 42.84% p.a., or 0.0288% of traded value, when foreign institutions are their exclusive counterparty. (Domestic institutions trading with foreigners do even better at 51.8% p.a.). Our findings are contrary to some of the existing empirical literature on household investors derived from calendar-time portfolios. When we split households into informationally advantaged (i.e., located near Nokia) and disadvantaged, we find that while the former are the superior traders, both household groups continue to outperform foreign investors and Helsinki households outperform their domestic institutional rivals.

Keywords: Households, Institutional investors, Calendar-time, Horizon-invariant, Trading performance

JEL Classification: G11, G12, G14

Suggested Citation

Lu, Wei and Swan, Peter Lawrence and Westerholm, P. Joakim, 'Other People’s Money': The Trading Performance of Household Investors vs. Delegated Money Managers (October 26, 2016). 28th Australasian Finance and Banking Conference; Second Annual Volatility Institute at NYU Shanghai (VINS) 2016. Available at SSRN: https://ssrn.com/abstract=2571761 or http://dx.doi.org/10.2139/ssrn.2571761

Wei Lu

The University of New South Wales ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Commonwealth Bank of Australia - Realindex Investments ( email )

Level 2, Darling Park Tower 1
201 Sussex Street
Sydney, NSW 2000
Australia

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

P. Joakim Westerholm

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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