To Follow or Not to Follow - An Empirical Analysis of the Returns of Actors on Social Trading Platforms

32 Pages Posted: 13 Feb 2018

See all articles by Gregor Dorfleitner

Gregor Dorfleitner

University of Regensburg - Department of Finance

Lukas Fischer

University of Regensburg - Department of Finance

Carina Lung

University of Regensburg - Department of Finance

Philipp Willmertinger

University of Regensburg - Department of Finance

Nico Stang

affiliation not provided to SSRN

Natalie Dietrich

University of Regensburg - Department of Finance

Date Written: January 24, 2018

Abstract

We analyze the returns of traders, i.e. signal providers, on social trading platforms and of investors following these traders by utilizing more or less sophisticated investment strategies. It turns out that simply investing in those traders with the highest accumulated returns leads to high losses, while taking the Sharpe ratio into account improves the achieved returns. Positive returns, however, are only possible for complex strategies that consider information on the risk of the signal providers' portfolios. Moreover, no strategy reveals a positive abnormal return after transaction costs in the sense of a Carhart four-factor model. Further, we analyze predictors of the weekly returns of the signal providers in a panel set up. We find that highly active trading behavior is negatively related with the returns, while there is no wisdom-of-the-crowd effect, in the sense of a positive relationship of the number of followers or invested capital with the returns.

Keywords: Social trading, performance analysis, panel regression, signal providers, mirror trading, investment strategies

Suggested Citation

Dorfleitner, Gregor and Fischer, Lukas and Lung, Carina and Willmertinger, Philipp and Stang, Nico and Dietrich, Natalie, To Follow or Not to Follow - An Empirical Analysis of the Returns of Actors on Social Trading Platforms (January 24, 2018). Available at SSRN: https://ssrn.com/abstract=3108422 or http://dx.doi.org/10.2139/ssrn.3108422

Gregor Dorfleitner (Contact Author)

University of Regensburg - Department of Finance ( email )

Regensburg, 93040
Germany

Lukas Fischer

University of Regensburg - Department of Finance ( email )

Regensburg, 93040
Germany

Carina Lung

University of Regensburg - Department of Finance ( email )

Regensburg, 93040
Germany

Philipp Willmertinger

University of Regensburg - Department of Finance ( email )

Regensburg, 93040
Germany

Nico Stang

affiliation not provided to SSRN

Natalie Dietrich

University of Regensburg - Department of Finance ( email )

Regensburg, 93040
Germany

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