Systematic Noise

33 Pages Posted: 14 Aug 2005

See all articles by Brad M. Barber

Brad M. Barber

University of California, Davis

Terrance Odean

University of California, Berkeley - Haas School of Business

Ning Zhu

China Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management

Date Written: May 2006

Abstract

A substantial literature in institutional herding examines reasons for and evidence of correlated trading across institutional investors, but little has been written about the extent to which individual investor trading is correlated or why. We document that the trading of individuals is highly correlated and surprisingly persistent. Furthermore, we find that the systematic trading of individual investors is driven by their own decisions - trades they initiated - rather than by passive reactions to institutional herding. We discuss why this correlation is unlikely to stem from the same motivations as institutional herding. Correlated trading by individuals is a necessary condition for the trading biases of individual investors to affect asset prices, since the trades of any particular individual are likely to be small. The preferences for buying some stocks while selling others must be shared by many individual investors if these preferences are to affect prices. We analyze trading records for 66,465 households at a large national discount broker between January 1991 and November 1996 and 665,533 investors at a large retail broker between January 1997 and June 1999. Using a variety of empirical approaches, we document that the trading of individuals is more coordinated than one would expect by mere chance. For example, if individual investors are net buyers of a stock this month, they are likely to be net buyers of the stock next month.

Keywords: Noise trading, herding, individual investors,

Suggested Citation

Barber, Brad M. and Odean, Terrance and Zhu, Ning, Systematic Noise (May 2006). AFA 2004 San Diego Meetings; EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=474481 or http://dx.doi.org/10.2139/ssrn.474481

Brad M. Barber (Contact Author)

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Terrance Odean

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-6767 (Phone)
510-666-2561 (Fax)

HOME PAGE: http://www.haas.berkeley.edu/faculty/odean.html

Ning Zhu

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Yale School of Management ( email )

135 Prospect Street
Box 208200
New Haven, CT 06520-8200
United States

HOME PAGE: http://pantheon.yale.edu/~nz26/

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-3871 (Phone)
530-752-2924 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/Faculty/Zhu/

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