Title: How do Individual, Institutional, and Foreign Investors Win and Lose in Equity Trades Evidence from
1How do Individual, Institutional, and Foreign
Investors Win and Lose in Equity Trades?
Evidence from Japan
- Kee-Hong Bae
- Korea University and Queens University
- Takeshi Yamada?
- National University of Singapore
- Keiichi Ito
- Nomura Securities International, New York
2Efficient markets
- No investors consistently perform better (or
worse) than others - On the other hand.
- Many studies have found different investor types
have distinct patterns of trade - Research question
- How are these patterns related to performance?
3Previous studies Individuals (Institutions)
have poor (good) performances
- Barber-Odean (2000), Odean (1999) AER,
Lee-Liu-Odean (2004) - Generally poor performance after trading cost
- High turnover
- Grinblatt-Keloharju (2000) JFE
- Do not pick future winning stocks very well
- Cohen (1999)
- Individuals buy from institutions after price
increases bad timers - Cohen-Gompers-Vuolteenhao (2002) JFE
- Institutions profit from individuals from
underreaction of prices to good cash flow news
4Previous studiesDomestic vs. foreign investors
- Foreigners predicts future returns better than
domestic investors - Seasholes (2000), Froot-OConnell-Seasholes
(2001) JFE, Froot-Ramadorai (2001), Karolyi
(2002) PBFJ, Kamesaka-Nofsinger-Kawakita (2003)
PBFJ - Domestic investors predicts future returns better
- Dahlquist-Robertsson (2004) JBF
- Foreigners do not have private information
advantage - Choe-Kho-Stultz (2005) RFS
- Dvorak (2005) JF
- Foreigners buy more after large price hikes
- Choe-Kho-Stultz (2005) RFS
5Our paper
- Examine all investor types across the market
- Examine different aspects of trade performance
- market timing
- price spreads
- trading interval
- Examine how gains and losses shift among
different investor types
6DataTokyo Stock Exchange (1st Section) weekly
trading data
- Jan 1991-April 1999 (until trade were allowed off
the exchange) - Buy and sell trade volume and value
- Trade by different investor types
- Individual investors, nonfinancial corporations,
mutual funds, insurance companies, banks,
proprietary trades of securities firms
7Table 1.Sell price/Buy price Spread
- Trade-weighted sell and buy price spreads
- Individual 11.75
- Nonfonancial corp 5.22
- Mutual funds 0.50
- Insurance co -12.92
- Banks 32.16
- Foreigners -1.49
- Proprietary traders -0.16
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9Table 2 Simple correlations
- Correlations of net buys
- Domestic investors vs. foreign investors
- Nonprofessional investors vs. institutional
investors (money managers) - Correlations with market returns
- The net buy of foreign investors have strong
positive correlation with past and future
returns. - Domestic investors have negative correlations
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11Table 3 Seasonal patters of trade
- Fiscal-year-end selling of domestic institutions
- Fiscal-year-end buying of foreign investors (and
individual investors)
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14Performance of Equity Trading
- Trading gains Net cash flows generated by
trades - Net increase in portfolio holdings due to trade
not due to capital gains/losses as in
conventional performance measures - Standardization
- Number of shares Buy and sell the same number of
shares - Value of trades net buy is zero yen over the
observation period - Can compare across different investor types
- Testable statistic
15Overall net trading gains
16Net gains from intertemporal price spreads
17Net gains from market timing
18Test
- Null hypotheses
- ?0, ps0, pT0
- Signed-rank test
- Overlapping data (dependency) and seasonal
patterns (periodicity) - Cannot use conventional standard error as it
assumes independent data - Generate block bootstrap sample for testing
19Table 4 Panel AAll months
- The figures are in Yen that are generated from
buy and sell trades with a median value of 100
yen each. - Individual investors
- gain for short-term intervals from positive price
spreads (due to selling the winners and holding
onto the losers?) - but loses in long-term from poor market timing
- Foreigners (and banks)
- positive timing performance
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21Table 4 Panel BFiscal-year-end
- Foreign investors gain more over the Jan-Mar
period (especially from market timing) - Banks, non-financial corporations, insurance
companies lose more during Jan-Mar - Foreigners take advantage of the selling of
domestic institutions. - Selling might be due to year-end adjustment of
portfolio and/or accounting reasons.
22Table 5 Correlations of trading gains among the
investor types
- Net gains from price spreads
- Shifts between nonprofessional investors
(individual and nonfinancial corporations) and
institutional investors (smart money managers) - Net gains from timing performance
- Shifts between foreign and domestic investors
- This effect dominates the overall result
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24Conclusion
- Different investor types have different sources
of equity trading gains and losses - Individual investors are poor in predicting
future market returns but might gain in
short-term trading by churning stocks - Foreign investors might not have better private
information and are momentum traders
(Brennan-Cao, 1997). Despite this fact, they are
good in predicting future returns.
25Conclusion
- Different institutional background of the
investors provides opportunity for trade. - Foreigners buy up from domestic institution at
fiscal-year-end