Do Limit Orders Alter Inferences About Investor Performance and Behavior?
62 Pages Posted: 8 Dec 2003 Last revised: 8 Feb 2010
Date Written: October 7, 2009
Individual investors lose money around earnings announcements, experience poor post-trade returns, exhibit the disposition effect, and make contrarian trades. Using simulations and trading records of all individuals in Finland, I find that investors’ use of limit orders is largely responsible for these trading patterns. These patterns arise mechanically because limit orders are price-contingent and face the adverse selection problem. Reverse causality from behavioral biases to order choices does not appear to explain my findings. I propose a simple method for measuring a data set’s susceptibility to this limit order effect.
Keywords: investor behavior, individual investors, limit order effect
JEL Classification: G11
Suggested Citation: Suggested Citation