TAILIEUCHUNG - Individual Investor Trading and Stock Returns

The evidence from the pooled data is simple and intuitive but is open to criticism because contemporaneous international stock returns are likely to be positively correlated. It is well known that cross-sectional correlation in returns can lead to understated estimates of standard error and inflated t-statistics (., Bernard 1987). However, this concern is unlikely to be overly important in our setting for two reasons. First, Bernard (1987) shows that problems due to cross-sectional dependence in returns are less pronounced for shorter time-series, and are fairly mild for the case of daily returns. Second, Hirshleifer and. | THE JOURNAL OF FINANCE VOL. LXIII NO. 1 FEBRUARY 2008 Individual Investor Trading and Stock Returns RON KANIEL GIDEON SAAR and SHERIDAN TITMAN ABSTRACT This paper investigates the dynamic relation between net individual investor trading and short-horizon returns for a large cross-section of NYSE stocks. The evidence indicates that individuals tend to buy stocks following declines in the previous month and sell following price increases. We document positive excess returns in the month following intense buying by individuals and negative excess returns after individuals sell which we show is distinct from the previously shown past return or volume effects. The patterns we document are consistent with the notion that risk-averse individuals provide liquidity to meet institutional demand for immediacy. For a variety of reasons financial economists tend to view individuals and institutions differently. In particular while institutions are viewed as informed investors individuals are believed to have psychological biases and are often thought of as the proverbial noise traders in the sense of Kyle 1985 or Black 1986 . One of the questions of interest to researchers in finance is how the behavior of different investor clienteles or their interaction in the market affects returns. In this paper we focus on the interaction between individual investors and stock returns. Specifically we examine the short-horizon dynamic relation between the buying and selling by individuals and both previous and subsequent returns using a unique data set provided to us by the NYSE. The data set was constructed from the NYSE s Consolidated Equity Audit Trail Data CAUD files that contain detailed information on all orders that execute on the exchange. For each stock on each day we have the aggregated volume of executed buy and sell orders of individuals. This information enables us to create a measure of net individual investor trading. We examine the extent to which intense net buying or .

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