We use a two-year panel of individual accounts in an S&P 500 index mutual fund to examine the trading and investment behavior of more than 91 thousand investors who have chosen a low-cost, passively managed vehicle for savings. This allows us to characterize investors ’ heterogeneity in terms of their investment patterns. In particular, we identify positive feedback traders as well as contrarians whose activities are conditional upon preceding day stock market moves. We test the consistency and profitability of these conditional strategies over time. We find that more frequent traders are typically contrarians, while infrequent traders are more typically momentum investors. The dynamics of these investor classes help us to partially examine the question of the marginal investor over the period of our study. We find that the behavior of momentum investors is typically more correlated to changes in the S&P 500 and we trace its dynamics over time. We build up “behavioral factors ” based on contrarian and momentum flows and show that they perform well against a benchmark of loadings on latent factors extracted from returns. We also use the behavior of momentum and contrarian investors to build a measure of “market polarization”. This captures the dispersion of beliefs among the investors and helps to account for asset pricing better than standard measures of dispersion of beliefs. Acknowledgments: We thank Fidelity for providing us with the data for this study. We thank the International Center for Finance at the

The investment behavior and performance of various investor types: a study of Finland's unique data set �

European Finance Association, DePaul/the Federal Reserve Bank of Chicago, the University of

A unique data set allows us to monitor the buys, sells, and holds of individuals and institutions in the Finnish stock market on a daily basis. With this data set, we employ Logit regressions to identify the determinants of buying and selling activity over a two-year period. We find evidence that investors are reluctant to realize losses, that they engage in tax-loss selling activity, and that past returns and historical price patterns, such as being at a monthly high or low, affect trading. There also is modest evidence that life-cycle trading plays a role in the pattern of buys and sells. THE EXTRAORDINARY DEGREE OF TRADING ACTIVITY in financial markets represents one of the great challenges to the field of finance. Many theoretical models in finance, such as those found in Aumann ~1976! and Milgrom and Stokey ~1982!, argue that there should be no trade at all. Empirical research by Odean ~1999! also shows that the trades of many investors not only fail to cover transaction costs, but tend to lose money before transaction costs. To

We examine the cross-sectional relation between leverage and future returns while considering the dynamic nature of capital structure and potentially delayed market reactions. Prior studies find a negative relation between leverage and returns that contradicts standard finance theory. We decompose leverage into target and excess components and find that excess leverage drives this negative relation. We also find that excess leverage predicts firm fundamentals, and that the negative relation between excess leverage and future returns can be explained by investors ’ failure to react promptly to the information in excess leverage about the firm’s probability of distress and future asset growth. Under static asset pricing theories such as the CAPM or the APT, financial leverage has a straight-forward effect on stocks ’ expected returns through betas on systematic factors. Controlling for the effects of leverage on factor sensitivities, one should find no relation between leverage and expected returns; controlling only for asset risk, the relation between leverage and expected returns should be positive because debt can magnify exposure to systematic risks. Notwithstanding the simplicity of these predictions, prior empirical studies find the opposite relation. In particular, Penman, Richardson, and Tuna (2007) document a negative association

In this paper, we report the first empirical tests concerning the performance of international investment strategies recommended by a panel of investment houses from 1982 through 2001. The data for this study comes from surveys published in the Financial Report, a confidential newsletter purchased by The Economist Newspaper, Ltd., in 1989. In the surveys, the investment houses recommended strategic asset allocations among equity, bonds, and cash, as well as tactical equity allocations across six countries. The performance of the recommended portfolio weights are compared to several pre-specified static benchmark portfolios. We also compare the returns of the recommended portfolio weights to a set of 1,000 returns that are generated by randomly shuffling the recommended weights. As a final measurement, we test whether the investment houses had superior information after adjusting for a set of conditioning variables. In this sample, it appears that the investment houses had little skill at recommending tactical equity allocations across countries. However, it does appear that the investment houses, as a group, had some skill concerning strategic asset allocations. We find that the market crash of