University Of Arizona
Are Retail Investors Smarter Than We Think?
Friday, April 27th, 2012
The Wisdom of Retail Traders
by MoneyScience
Thu, 26 Apr 2012 01:00:00 GMT
Study shows retail investors can predict future stock returns
A forthcoming paper in the Journal of Finance by Professor Paul Tetlock, Roger F. Murray Associate Professor of Finance at Columbia Business School, and Eric Kelley, Assistant Professor, Finance, the Eller College of Management at the University of Arizona, finds that retail investors’ are not as unsophisticated as many think: they can actually predict future stock returns. The study shows that retail traders buy in advance of price increases and sell in advance of price decreases that occur over the next month. This research is of particular interest to institutional and retail investors whose profits depend on monthly stock price movements. Columbia Business School’s Ideas at Work also covered this research when it was a working paper.
The researchers analyzed proprietary trading data that includes retail orders in nearly all common stocks listed in the United States routed to two market centers from February 26, 2003 through December 31, 2007. The data includes $2.6 trillion in executed trades, which was roughly one-third of all self-directed retail trading in the US during that time period. The researchers first measured retail trader order imbalances, adding up all buys and subtracting all sells, and found that the net buying activity of retail investors positively predicts future stock returns for at least one month and up to three months. They then combined the order data with comprehensive newswire data from Dow Jones (DJ) to test if certain hypotheses could account for retail traders’ ability to predict returns.
The study distinguishes retail traders’ aggressive (market) orders – directives to trade regardless of price – from their passive (limit) orders – instructions to wait for a certain price before trading. Although both types of orders predict stock returns, they do so for different reasons. Only buying activity from aggressive orders predicts positive news events about a stock, such as an announcement that a firm’s earnings beat analysts’ expectations. This evidence suggests that aggressive retail investors trade on information that others aren’t yet aware of, and that a stock’s price takes some time to reflect this information. Professor Tetlock explains, “Suppose there are a relatively large number of physicists in the United States who know a lot about microchips. They may know something about AMD, the microchip producer that stock analysts on Wall Street don’t know. We should see newswire stories with many positive words about AMD start to appear in the weeks after the physicists started buying AMD, when the market and the financial press become aware of that private information. And it does turn out that aggressive buying usually precedes positive news.”
In contrast, retail traders’ passive orders may predict returns because they provide liquidity to other investors with urgent trading needs. Professor Tetlock describes this hypothesis, “Maybe AMD suffered a negative liquidity shock if a mutual fund had to sell it to meet client withdrawals. Retail traders who recognize this can step in and buy AMD stock cheap, which provides liquidity to the mutual fund. The traders eventually realize profits when the stock rebounds, once people see that AMD’s profits haven’t changed and there is nothing fundamentally wrong with the firm.” Consistent with this hypothesis, the researchers found that retail traders’ passive orders did not predict news about stocks.
Part of the unexpected skill exhibited by retail traders may come from a change in the trader population. “Traders holding Internet stocks in 2000 would have lost about 80 percent of their money over the following two years, whereas traders with more diversified investments would have kept most of their wealth,” Professor Tetlock says. “It’s an evolution argument: survival of the fittest. Those who were actively trading and doing poorly simply lost their money.”
About Columbia Business School
Led by Dean Glenn Hubbard, the Russell L. Carson Professor of Finance and Economics, Columbia Business School is at the forefront of management education for a rapidly changing world. The school’s cutting-edge curriculum bridges academic theory and practice, equipping students with an entrepreneurial mindset to recognize and capture opportunity in a competitive business environment. Beyond academic rigor and teaching excellence, the school offers programs that are designed to give students practical experience making decisions in real-world environments. The school offers MBA and Executive MBA (EMBA) degrees, as well as non-degree Executive Education programs. For more information, visit www.gsb.columbia.edu.
Copyright © MoneyScience
Tags: Assistant Professor, Columbia Business School, Common Stocks, Dow Jones, Dow Jones Dj, Eller College Of Management, Forthcoming Paper, Future Stock, Hypotheses, Journal Of Finance, Price Decreases, Price Increases, Professor Paul, Proprietary Trading, Retail Investors, Retail Orders, Retail Traders, Retail Trading, Stock Price Movements, University Of Arizona
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10 Things To Stop Caring About Today, and other (Long) Weekend Reads
Friday, October 7th, 2011
Here are this weekend’s reading diversions for your personal enlightenment. Have a happy, long Thanksgiving weekend.
How Parents Can Deal With Having A Favorite Child
According to Edwards, one reason a parent might get along with one child more than another stems from temperament — if your child is similar to you, you’re more likely to feel compatible and want to spend time with that child, she said. A parent might also favor one child if he or she was born after lots of trying, if the child is the only girl or boy in the family, or if the child is easy to discipline. Birth order plays a role too, she said. For example, if you’re a first child and your daughter is as well, you might relate to her more easily than you do to a second or third child
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We All Get Shorter As We Age, Research Confirms
After age 40, it’s not uncommon to start getting just a little bit shorter. But shrinking too much or too fast could be a sign of health problems, research shows.
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Yawning Cools Down The Brain, Study Finds
Researchers at Princeton University and the University of Arizona found that people are more likely to yawn in the wintertime, since the temperature of the outside air is cooler than their internal body temp. That’s because when you yawn, you bring outside air into your body — and when you yawn to bring in cold air, it cools down your brain.
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Multivitamins For A Headache Or Migraine | LIVESTRONG.COM
Your body needs several key vitamins and minerals to maintain a healthy nervous system, which can impact the development of headaches. Riboflavin and B-6, two B vitamins, along with vitamin D and magnesium, have been shown to reduce the frequency of migraines, so you should look for a multivitamin that contains all these nutrients. However, you should follow your doctor’s advice regarding proper migraine treatment.
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10 Things To Stop Caring About Today
Every day is a new beginning. But in life, sometimes you have to stop before you can truly begin. So starting today …
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Daniel P. Malito: Explained: What Are Autoimmune Diseases?
What is autoimmune disease? If we break down the word, you can see that it starts with “aut,” which comes from the ancient Greek word for “self.” I would hope you know that “immune” refers to the body’s immune system. So, autoimmune or “self-immune-system” diseases are those in which a patient’s immune system is attacking itself. The body’s mechanisms can no longer differentiate between foreign bodies and friendly bodies. Normally, the system’s white blood cells help protect the body, but the immune response in autoimmune patients destroys normal body tissue and foreign tissue alike. Think of it as friendly fire on a very minute scale.
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The Top 5 worst roads, bridges and tunnels in Canada (w/poll)Autoblog Canada
A while back we posted a story about a bridge in the US that had been shut down indefinitely since a major crack was found irreparable. In Canada, we used to pride ourselves on superior roadways to that of the US, but that is rapidly changing. As governments of all levels struggle to stay on top of the crumbling infrastructure, we decided to take it to our Autobloggers to decide what is the worst of the worst for our cars and safety
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Rita Altman, R.N.: Memory Loss Doesn’t Equal Loss of Humanity
People with Alzheimer’s disease or other forms of memory loss often seem to live in a different reality or a different time and place. Despite this disconnect, we should not simply dismiss a person as “gone” or focus so narrowly on all the abilities that the person has lost. Instead, we must focus on the uniqueness of each person and bring an open mind to how we address their needs — the basic human needs we all share.
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Childless men more likely to die of heart disease: Study
A decade-long study of 135,000 men found that those who did not have children had a higher risk of dying from heart disease than those who did, raising new questions over the links between fertility and overall health, U.S. researchers said on Monday.
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Thin parents pass on ‘skinny genes’ to their children | Mail Online
A new study found children with thinner parents are three times more likely to be thin than children whose parents are overweight.
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Pale-Skinned People May Need Vitamin D Supplements: Study
“Fair-skinned individuals who burn easily are not able to make enough vitamin D from sunlight and so may need to take vitamin D supplements,” study researcher Julia Newton-Bishop, of the Cancer Research UK Centre at the University of Leeds, said in a statement.
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6 Ways To Avoid Mindless Eating And Excess Calories
“If you’re just grabbing and eating, you’re going to end up most likely consuming more calories than you need,” Gans told HuffPost. “And by consuming more calories than you need, you’ll most likely find you’re gaining weight because you’re not paying attention to what you are eating.”
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Thanksgiving Day in Canada has been a holiday on the second Monday of October since 1957. It is a chance for people to give thanks for a good harvest and other fortunes in the past year.
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Tags: B Vitamins, Birth Order, Body Temp, Brain Study, Canadian Market, Diversions, Favorite Child, Infrastructure, Migraine Treatment, Migraines, Multivitamin, Multivitamins, Personal Enlightenment, Princeton University, Riboflavin, Thanksgiving Weekend, Third Child, University Of Arizona, Vitamin D, Vitamins And Minerals, Vitamins Minerals, Wintertime
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When Cheaper Isn’t Always Better, and other Weekend Reads
Friday, September 23rd, 2011
Here are this week’s reading diversions for your personal enlightenment. Have a terrific weekend!
Lifelong musicians ‘have better hearing’
The researchers suggest that lifelong musicianship mitigates age-related changes in the brain, probably due to musicians using their auditory systems at a high level on a regular basis.
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Low-fat yoghurt ‘child asthma risk’ during pregnancy
Pregnant women who ate low-fat yoghurt with fruit once a day were found to be 1.6 times more likely to have children who developed asthma by age seven, compared with children of women who did not eat low-fat yoghurt.
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David Valdes Greenwood: 5 (More) Shocking Side Effects Of Becoming A Dad
In case you missed it, researchers at Northwestern University have spent 26 years measuring testosterone in a group of Filipino men, and have come to two conclusions: becoming a new father dramatically lessens a man’s testosterone levels and staying involved as a parent reduces it even more. According to the study’s authors, these decreased levels of testosterone are nature’s way of making a new dad less likely to go rutting about while his spouse stays at home in fat pants. Alas, the study contains no evidence that this effect endures.
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Yawning Cools Down The Brain, Study Finds
Researchers at Princeton University and the University of Arizona found that people are more likely to yawn in the wintertime, since the temperature of the outside air is cooler than their internal body temp. That’s because when you yawn, you bring outside air into your body — and when you yawn to bring in cold air, it cools down your brain.
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Diabetes Doubles Alzheimer’s Risk, Study Finds
Diabetes could contribute to dementia in several ways, which researchers are still sorting out. Insulin resistance, which causes high blood sugar and in some cases leads to type 2 diabetes, may interfere with the body’s ability to break down a protein (amyloid) that forms brain plaques that have been linked to Alzheimer’s. High blood sugar (glucose) also produces certain oxygen-containing molecules that can damage cells, in a process known as oxidative stress.
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Six supplements to help you get a good night…
If you’re having trouble sleeping, first have a look at your diet and exercise routine. If after doing that, you still need a bit of herbal help, you can try one or more of these natural sleep aids:
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When Cheaper Isn’t Always Better
Switching from brand name to generic drugs is an easy way to slash your monthly medical budget—but keep in mind that there actually can be a difference in formulations from the brand name to generic versions when it comes to some prescription products. If you are taking a generic antibiotic, it’s probably a relatively safe move to make the switch to generic, but other medicines, like a generic low dose birth control pill, for example, might actually produce a different reaction in your body if you’ve become accustomed to a specific name brand formulation. (That doesn’t mean you can’t or shouldn’t make the switch—just be sure that you address the potential causes for concern with your doctor).
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Building and maintaining excellent vision isn’t something that happens without effort. Even if you believe nothing can be done to help your vision, taking steps to improve nutrition can go a long way toward preserving, or even improving, the health of your eyes.
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How Parents Can Deal With Having A Favorite Child
According to Edwards, one reason a parent might get along with one child more than another stems from temperament — if your child is similar to you, you’re more likely to feel compatible and want to spend time with that child, she said. A parent might also favor one child if he or she was born after lots of trying, if the child is the only girl or boy in the family, or if the child is easy to discipline. Birth order plays a role too, she said. For example, if you’re a first child and your daughter is as well, you might relate to her more easily than you do to a second or third child
****
We All Get Shorter As We Age, Research Confirms
After age 40, it’s not uncommon to start getting just a little bit shorter. But shrinking too much or too fast could be a sign of health problems, research shows.
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Tags: Auditory Systems, Becoming A Dad, Body Temp, Brain Plaques, Brain Study, Child Asthma, David Valdes Greenwood, Filipino Men, High Blood Sugar, Insulin Resistance, Northwestern University, Personal Enlightenment, Princeton University, Protein Amyloid, Risk Study, Terrific Weekend, Testosterone Levels, Type 2 Diabetes, University Of Arizona, Wintertime
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