Fool's Mate: What Does CHESS Tell Us About Individual Investor Trading Performance?

Abstract

We investigate the short-term relation between individual investor trading and stock returns on the Australian Securities Exchange. Stocks heavily bought by individual investors underperform stocks heavily sold over the subsequent three days, with respective returns on to a long-short portfolio of -93, -67 and -12 basis points on days one, two, and three. Individuals lose on their passive orders, except in large stocks, for which they lose on aggressive orders. Foreign institutions gain from taking the opposite side of individual trades. We present a liquidity-based explanation for the findings.

Keywords: Individual investors, institutional investors, short-term reversals, liquidity

JEL Classification: G14