Essays on investor behavior and trading activity

Abstract This thesis investigates a set of equity market phenomena associated with investors' trading activity, using a comprehensive Finnish Central Securities Depository (FCSD) database that records practically all trades by Finnish investors. This database enables us to classify a large number of heterogeneous investors using both economic and institutional characteristics. The first essay classifies investors by trading activity. It analyzes trading styles of active and passive investors during the boom in technology stocks 1997–2000. We find that the herding tendency of active investors grew monotonically, year by year. Particularly large active investors used momentum and growth strategies. Moreover, buy pressures of active investors were positively related to contemporaneous daily returns. Passive investors, on the other hand, herd very strongly and their trading exhibited a contrarian style throughout the sample period. The second essay focuses on the relation between day trading of individual investors and intraday stock price volatility. I find a strong positive relation between the individual investors' day trades and volatility for actively day traded stocks. This finding suggests that day trading tends to increase volatility and/or day traders tend to become more active on the days of high volatility. The third essay tests the theoretical proposition of Amihud and Mendelson (1986) that investors hold assets with higher bid-ask spreads for longer periods. We measure holding periods of individual investors directly and find that they are positively related to spreads. The models control for a variety of other stock characteristics (e.g. value vs. growth orientation) and investors' attributes (e.g. gender) affecting holding periods. The fourth essay studies how both individual and institutional investors with different levels of capital gains and losses react to earnings announcements. I find that both sign and magnitude of capital gains affect individual investors' abnormal trading volumes. Individual investors are less prone to sell when they are carrying loses rather than gains. Furthermore, they react less to earnings announcements when capital gains or losses are large (over 20%). Taken together these findings provide support for prospect theory. Institutional investors appear to be less affected by psychological factors underlying prospect theory

Personality traits and stock market participation

Abstract We analyze the relationship between personality traits and stock market participation. Our sample comes from combining personality trait scores and socioeconomic status information from the Northern Finland Birth Cohort 1966 with data from Finnish Central Securities Depository, the official register of stock holdings in Finland. We find the traits, and especially the subscales of the traits, to be significant predictors of stock market participation. In particular, exploratory excitability, extravagance, sentimentality, and dependence have large effects. One-standard-deviation changes in the subscale scores have marginal effects of up to 4 percentage points on the probability of participating in the stock market