The Trading Response of Individual Investors to Local Bankruptcies

88 Pages Posted: 21 Jan 2017 Last revised: 30 Sep 2020

See all articles by Christine Laudenbach

Christine Laudenbach

University of Bonn

Benjamin Loos

Technische Universität München (TUM) - TUM School of Management

Jenny Pirschel

ZEW – Leibniz Centre for European Economic Research

Johannes Wohlfart

University of Copenhagen

Multiple version iconThere are 4 versions of this paper

Date Written: September 30, 2020

Abstract

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

Laudenbach, Christine and Loos, Benjamin and Pirschel, Jenny and Wohlfart, Johannes, The Trading Response of Individual Investors to Local Bankruptcies (September 30, 2020). Available at SSRN: https://ssrn.com/abstract=2902088 or http://dx.doi.org/10.2139/ssrn.2902088

Christine Laudenbach (Contact Author)

University of Bonn ( email )

Bonn, 53113
Germany

Benjamin Loos

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.professors.wi.tum.de/digitalfinance/home/

Jenny Pirschel

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Johannes Wohlfart

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

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