The Trading Response of Individual Investors to Local Bankruptcies
88 Pages Posted: 21 Jan 2017 Last revised: 30 Sep 2020
Date Written: September 30, 2020
We examine how adverse local experiences that are uninformative of future returns affect households' investment behavior in the short term. Using data from a German online brokerage and a survey we show that retail investors sharply reduce risk taking in response to nearby firm bankruptcies. Adjustments in risk taking occur through immediate and transitory increases in trading, and seem to work through more pessimistic expectations about aggregate stock returns and increased risk aversion. Changes in background risks or wealth effects cannot explain our findings. Extrapolation from local experiences to aggregate expectations is inconsistent with optimal use of full or limited information.
Keywords: Individual investors, risk-taking, trading, experiences
JEL Classification: D14, G11
Suggested Citation: Suggested Citation