Individuals have long been suspected of being noise traders. We seek empirical evidence of this and suggest the individual trading weight as a proxy for noise trader risk. Based on a common stock sample of non-financial firms listed on the Korea Stock Exchange, we find that returns are higher for firms that are more densely traded by individual investors controlling for Fama and French's (1993) three factors of market, firm size and valuation, and Carhart's (1997) momentum factor. Furthermore, the excess return of portfolios sorted by the proportion of individual traders is an influential risk characteristic even under bull and bear market conditions. Additionally, tests based on average correlations and principal component analyses reveal that individuals generate systematic noise in the Korean stock market. Lastly, on a cross-country check, the individual trading factor is shown to affect stock returns in Taiwan as well.
Bibliographical noteFunding Information:
Special thanks are due to Kees Koedijk (the Editor), an anonymous referee, Warren Bailey, and Andrew Karolyi. We also thank Hyuk Choe, Ji-Woong Chung, Seth H. Huang, Sung Wook Joh, Bong-Chan Kho, Y. Han (Andy) Kim, Woojin Kim, Hwa-Taek Lee, Kuan-Hui Lee, Jaehoon Lee, Terrance Odean, Cheol Park, Rae Soo Park, and the participants at Seoul National University (2015), Korea Securities Association (2016), and Financial Management Association (2016) meetings. This research is based on a chapter from the Ph.D. dissertation of J.H. Choi at Seoul National University ( Choi, 2015 ). This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2016S1A5B5A07915509). Part of this research was conducted while P.M.S. Choi and J.H. Choi were visiting scholars at the Samuel Curtis Johnson Graduate School of Management, Cornell University, and were funded by the grants provided by the Fulbright Scholarship Program and Ewha Womans University. We are grateful for the data access and the research funds granted by FnGuide and the Korea Securities Association. Francis Joonsung Won provided excellent research assistance. Standard disclaimer rules apply, and all errors are our own.
© 2018 Elsevier Ltd
- Buy-sell imbalance
- Individual trading weight
- Noise trader risk
- Principal component analysis