Institutional and retail investor trading behavior in equity markets

Abstract

Through three essays, this dissertation elucidates households and institutional investors’ stock trading behavior and its applications to asset pricing. The first chapter utilizes seventeen years of comprehensive daily portfolio and trading data to analyze the relative trading performance of the universe of households, all domestic financial institutions, and all foreign institutions, in the Finnish market. I introduce a new methodology, dubbed “holding-period-invariant” portfolios, which is demonstrably superior to the conventional calendar-time methodology. Adopting a random informationless trading benchmark, I find that the households who choose to trade for themselves are economically and statistically superior traders, achieving an impressive internal rate of return of 42.84 percent p.a., against foreign institutions. Households located near company headquarters have a clear informational advantage against all-comers. The second chapter extends the HPI methodology to relate gender to stock trading performance using data on all individual Finnish investor trades over 1995-2011. Female investors make significant gains against male investors when trading major Finnish stocks, consistent with females tending to have a better ability as per the “theory of mind”, and hence better recognizing data patterns with superior trading intuition. Further, female investors prefer purchasing underpriced and selling overpriced stocks based on the trading signal of the difference between the contemporaneous price and moving averages over the short term to the long term. The result holds even after excluding spouse trading accounts, identified by matching family names, especially in regions close to Nokia and other company headquarters. The third chapter makes an “apples-to-apples” comparison between hedge funds and “other institutions” such as mutual funds’ trading performance. Eleven years of data on the daily portfolios and institutional transactions suggests that hedge funds are economically and statistically smarter traders with “other institutions” as exclusive counterparties, consistent with some empirical literature. The superior trading performance of hedge funds can be explained by their receipt of a daily private signal of fundamental value derived from the entire history of informed trades and prices, statistically rejecting the nested noisy partially revealing rational expectations equilibrium hypothesis.