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Effect of Investor Category Trading Imbalances on Stock Returns

Authors


  • *The authors gratefully acknowledge comments from Thomas Henker and Bruno Solnick and participants at the 2005 FMA meeting. The usual disclaimer applies.

Dr. Julia Henker, CFA
School of Banking and Finance
University of New South Wales UNSW
Sydney NSW 2052
Australia
j.henker@unsw.edu.au

ABSTRACT

Trading is the mechanism of the economist's ‘invisible hand,’ the means by which price discovery occurs. We use daily shareholdings data from the Australian equities clearinghouse to investigate the impact of the trading imbalances of investor categories on stock returns. Our evidence does not contradict the behavioral finance assumption that the trading of individual investors contributes to price discovery. Furthermore, we find that, while the trading of all investor categories Granger-causes returns, returns Granger-cause trading only for the individual investor category. That is, in the short term of up to 1 month, only individual investors engage in feedback trading.

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