Can Individual Investors Beat the Market?
Joshua D. Coval
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
David A. Hirshleifer
University of California, Irvine - Paul Merage School of Business
University of Michigan at Ann Arbor, The Stephen M. Ross School of Business
HBS Finance Working Paper No. 04-025
Harvard NOM Working Paper No. 02-45
We document strong persistence in the performance of trades of individual investors. The correlation of the risk-adjusted performance of an individual across sample periods is about 10 percent. Investors classified in the top performance decile in the first half of our sample subsequently outperform those in the bottom decile by about 8 percent per year. Strategies long in firms purchased by previously successful investors and short in firms purchased by previously unsuccessful investors earn abnormal returns of 5 basis points per day. These returns are not confined to small stocks nor to stocks in which the investors are likely to have inside information. Our results suggest that skillful individual investors exploit market inefficiencies to earn abnormal profits, above and beyond any profits available from well-known strategies based upon size, value, or momentum.
Number of Pages in PDF File: 39
Keywords: Individual Investors, Market Efficiency, Performance Persistence
JEL Classification: G1, D1
Date posted: January 6, 2003