Why Do Investors Trade More Following High Returns?
Psych 🧠- 251/300
Reader,
Do you have a risk-averse type personality? Like do you invest in stocks? ETFs? Funds?
Would you rather invest more following a higer return or cash out with the returns?!
What is it?
In this research, the focus is on how stock returns relate to trading volume and which theories can explain this connection.
Various theories have been proposed to clarify why high returns lead to more trading.
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This paper builds upon previous work to examine the return-volume relationship at different levels of stock returns: aggregate, style, and individual.
It's essential to consider these various levels since different theories connect trading volume with different types of returns.
The study expands upon earlier research by using stock-level cross-sectional data, allowing for a more in-depth analysis of trading behavior.
The findings suggest that multiple theories, including liquidity, participation, overconfidence, and more, contribute to the positive return-volume relationship.
Market-wide uncertainty also plays a role, with the relationship being stronger during uncertain times. Additionally, the study explores whether individual or institutional investors are more responsible for the return-volume relationship, finding that individual trading has a more significant impact.
The research also considers how external factors like changes in trading rules affect the return-volume relationship, leading to insights into the dynamics of stock trading and returns.
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What do I need to know?
By observing how people trade stocks when they gain or lose money, here's what was found:
1. People trade more when they see gains at different levels.
2. During uncertain times, they trade more after making money.
3. Positive gains make people more eager to trade.
4. Regular folks trade more after making money compared to big investors.
5. Recent changes in the stock market rules had an impact on trading behavior.
These findings match theories about how analysts' predictions and attention influence trading.
Sources:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4592131