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Technical Analysis and Individual Investors

Published on Nov 1, 2014in Journal of Economic Behavior and Organization1.40
· DOI :10.1016/j.jebo.2014.04.002
Arvid O. I. Hoffmann12
Estimated H-index: 12
(UM: Maastricht University),
Hersh Shefrin21
Estimated H-index: 21
(Santa Clara University)
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Abstract
We find that individual investors who use technical analysis and trade options frequently make poor portfolio decisions, resulting in dramatically lower returns than other investors. The data on which this claim is based consists of transaction records and matched survey responses of a sample of Dutch discount brokerage clients for the period 2000-2006. Overall, our results indicate that individual investors who report using technical analysis are disproportionately prone to have speculation on short-term stock-market developments as their primary investment objective, hold more concentrated portfolios which they turn over at a higher rate, are less inclined to bet on reversals, choose risk exposures featuring a higher ratio of nonsystematic risk to total risk, engage in more options trading, and earn lower returns.
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  • References (65)
  • Citations (37)
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References65
Newest
Published on Mar 1, 2017in Review of Finance1.94
Daniel Hoechle7
Estimated H-index: 7
(HSG: University of St. Gallen),
Stefan Ruenzi15
Estimated H-index: 15
(HSG: University of St. Gallen)
+ 1 AuthorsMarkus Schmid16
Estimated H-index: 16
(HSG: University of St. Gallen)
We use a dataset from a large retail bank to examine the impact of financial advice on investors’ stock trading performance and behavioral biases. Our data allow us to classify each individual trade as either advised or independent and to compare them in a trade-by-trade within-person analysis. Thus, our study is not plagued by the endogeneity problems typically faced by studies on financial advice. We document that advisors hurt trading performance. However, they help to reduce some of the beha...
Published on Oct 1, 2015in Management Science4.22
Anne Jones Dorn2
Estimated H-index: 2
,
Daniel Dorn7
Estimated H-index: 7
(Drexel University),
Paul Sengmueller7
Estimated H-index: 7
(Tilburg University)
This paper offers evidence from three different samples consistent with investors substituting between playing the lottery and gambling in financial markets. In the United States, increases in the jackpots of the multistate lotteries Powerball and Mega Millions are associated with significant reductions in small trade participation in the stock market. California-based discount brokerage clients and German discount brokerage clients are significantly less likely to trade during weeks with larger...
Published on Sep 1, 2013in Review of Finance1.94
Anders Anderson1
Estimated H-index: 1
This article documents a link between trading and diversification by using detailed trading records from a Swedish discount broker matched with individual tax records. Diversification is measured by the investors' stake size, defined as the fraction of their risky financial wealth invested in individual stocks through the broker under study. High-stake investors have concentrated portfolios, trade more, and achieve lower trading performance. They share several features with those who trade exces...
Published on Jul 1, 2013in Journal of Economic Dynamics and Control1.50
Christian David Dick5
Estimated H-index: 5
,
Lukas Menkhoff31
Estimated H-index: 31
(Leibniz University of Hanover)
This paper provides novel evidence on exchange rate expectations of both chartists and fundamentalists separately. These groups indeed form expectations differently. Chartists change their expectations more often; however, all professionals' expectations vary considerably as they generally follow strong exchange rate trends. In line with non-linear exchange rate-modeling, professionals expect mean reversion only if exchange rates deviate much from PPP. Chartists survive in FX markets as they for...
Published on Jun 17, 2013
Yigitcan Karabulut4
Estimated H-index: 4
(Goethe University Frankfurt)
In this paper, I analyze the role of financial advisors in individual investment decisions and ask whether financial advice is a reliable substitute for individuals' financial literacy. I report two main findings. First, I show that individuals who tend to be financially less sophisticated are more likely to consult professional advisors, which supports the notion that financial advice serves as a substitute for financial literacy. Second, when I analyze the impact of financial advice on portfol...
Published on Apr 1, 2013in Journal of Financial and Quantitative Analysis2.27
Bing Han15
Estimated H-index: 15
(University of Texas at Austin),
Alok Kumar28
Estimated H-index: 28
(UM: University of Miami)
This paper examines the characteristics and pricing of stocks that are actively traded by speculative retail investors. We find that stocks with high retail trading proportion (RTP) have strong lottery features and they attract retail investors with strong gambling propensity. Furthermore, these stocks tend to be overpriced and earn significantly negative alpha. The average monthly return differential between the extreme RTP quintiles is −0.60%. This negative RTP premium is stronger among stocks...
Published on Mar 1, 2013in Review of Financial Studies4.97
Yakov Amihud42
Estimated H-index: 42
(NYU: New York University),
Ruslan Goyenko9
Estimated H-index: 9
(Desautels Faculty of Management)
We propose that fund performance can be predicted by its R-super-2, obtained from a regression of its returns on a multifactor benchmark model. Lower R-super-2 indicates greater selectivity, and it significantly predicts better performance. Stock funds sorted into lowest-quintile lagged R-super-2 and highest-quintile lagged alpha produce significant annual alpha of 3.8%. Across funds, R-super-2 is positively associated with fund size and negatively associated with its expenses and manager's tenu...
Published on Jan 17, 2013
David M. Smith34
Estimated H-index: 34
(University at Albany, SUNY),
Christophe Faugère7
Estimated H-index: 7
(KEDGE Business School),
Ying Wang5
Estimated H-index: 5
(University at Albany, SUNY)
This study takes a novel approach to testing the efficacy of technical analysis. Rather than testing specific trading rules as is typically done in the literature, we rely on institutional portfolio managers’ statements about whether and how intensely they use technical analysis, irrespective of the form in which they implement it. In our sample of more than 10,000 portfolios, about one-third of actively managed equity and balanced funds use technical analysis. We compare the investment performa...
Published on Jan 1, 2013in Journal of Banking and Finance2.21
Arvid O. I. Hoffmann12
Estimated H-index: 12
(UM: Maastricht University),
Thomas Post11
Estimated H-index: 11
(UM: Maastricht University),
J.M.E. Pennings24
Estimated H-index: 24
Combining monthly survey data with matching trading records, we examine how individual investor perceptions change and drive trading and risk-taking behavior during the 2008–2009 financial crisis. We find that investor perceptions fluctuate significantly during the crisis, with risk tolerance and risk perceptions being less volatile than return expectations. During the worst months of the crisis, investors’ return expectations and risk tolerance decrease, while their risk perceptions increase. T...
Published on May 21, 2012
John Chalmers11
Estimated H-index: 11
(UO: University of Oregon),
Jonathan Reuter12
Estimated H-index: 12
(NBER: National Bureau of Economic Research)
Within the Oregon University System’s defined contribution retirement plan, one investment provider offers access to face-to-face financial advice through its network of brokers. We find that younger, less highly educated, and less highly paid employees are more likely to choose this provider. To benchmark the portfolios of broker clients, we use the actual portfolios of self-directed investors and counterfactual portfolios constructed using target-date funds, a popular default investment. Broke...
Cited By37
Newest
Published on Apr 15, 2019in Applied Economics0.97
Paolo Mazza3
Estimated H-index: 3
(Lille Catholic University),
Mikael Petitjean9
Estimated H-index: 9
(UCL: Université catholique de Louvain)
Published on Jul 31, 2018in The Journal of Portfolio Management0.72
StatmanMeir35
Estimated H-index: 35
(Santa Clara University)
Typical asset managers operate within standard finance, wherein investors are described as rational , or within the first generation of behavioral finance, wherein they are described as irrational . Asset managers do well, however, to operate within the second generation of behavioral finance, presented briefly here and in detail in the author’s book Finance for Normal People . That generation describes investors as normal , with a wide range of normal wants, such as hope for riches and freedom ...
Published on Jan 1, 2018
Zamali Tarmudi5
Estimated H-index: 5
,
Nowyannie Willie D. Tamsin1
Estimated H-index: 1
,
Janvin Janteng
The aim of this study is to determine the ranking of industry alternatives using individual investors’ perceptions. It focuses on the study of portfolio investments based on individual investors’ perceptions on industry selection in unfavorable market conditions. This paper utilises the Fuzzy Delphi Method (FDM) to identify and rank the best performing industry options. The method is equipped with three levels of confidence - Very Optimistic, Neutral, and Very Pessimistic - which are rarely expl...
Syed Zain ul Abdin (UOL: University of Lahore), Omer Farooq7
Estimated H-index: 7
(KEDGE Business School)
+ 1 AuthorsMariam Farooq1
Estimated H-index: 1
(University of Central Punjab)
Previous studies have examined the impact of heuristics on the investment performance of individuals. This paper examines mediated links through fundamental and technical stock market anomalies. Findings rely on data collected through surveys of 324 investors. The results show that one mechanism, fundamental anomalies mediate the heuristics–investment performance link, and technical anomalies are not significant mediators of impact on investment performance of individuals. Of four heuristics com...
Published on Nov 1, 2017in Journal of Banking and Finance2.21
Thomas Renault1
Estimated H-index: 1
(Lille Catholic University)
We implement a novel approach to derive investor sentiment from messages posted on social media before we explore the relation between online investor sentiment and intraday stock returns. Using an extensive dataset of messages posted on the microblogging platform StockTwits, we construct a lexicon of words used by online investors when they share opinions and ideas about the bullishness or the bearishness of the stock market. We demonstrate that a transparent and replicable approach significant...
Published on Sep 18, 2017in International Journal of Emerging Markets
Mohammad Tariqul Islam Khan2
Estimated H-index: 2
,
Siow-Hooi Tan7
Estimated H-index: 7
,
Lee-Lee Chong4
Estimated H-index: 4
Purpose The purpose of this paper is to investigate who trade actively in the Malaysian stock market and what determines investors’ active trading decisions. Design/methodology/approach Using a cross-sectional survey on individual investors, the study identifies active and inactive investors and then, investigates active trading by estimating binary logistic regression. Findings Active investors in Malaysia are more likely to be male, working in non-finance-related sectors and are more experienc...
Published on Sep 1, 2017in Finance Research Letters1.71
Yi-Cheng Tsai1
Estimated H-index: 1
(NTU: National Taiwan University),
Chin-Laung Lei19
Estimated H-index: 19
(NTU: National Taiwan University)
+ 3 AuthorsChuan-Ju Wang4
Estimated H-index: 4
(CIT: Center for Information Technology)
This paper presents the persistent behavior hypothesis for financial markets, which is tested statistically on five stock indices from 2001 to 2014. We find significant results in all five stock markets for the full sample period as well as subperiods. A persistent behavior strategy (PBS) on index futures is also presented, the net annual returns of which are significantly higher than 15% in all futures markets including transaction costs. The best performance, about 27%, occurs in the E-mini NA...
Published on Sep 1, 2017in Journal of Behavioral and Experimental Finance1.14
Sara Jonsson4
Estimated H-index: 4
(KTH: Royal Institute of Technology),
Inga-Lill Söderberg4
Estimated H-index: 4
(KTH: Royal Institute of Technology),
Mats Wilhelmsson16
Estimated H-index: 16
(KTH: Royal Institute of Technology)
Abstract We investigate characteristics of household investors stating they would increase shares in a mutual fund in a situation where this fund has exhibited a negative past performance. Hence, we investigate characteristics of investors behaving lite contrarians. We use a survey methodology to examine the effects of risk tolerance, perceived competence, and of being informed on households’ contrarian behavior. To investigate the stability of these characteristics we test our hypothesis in thr...