In a paper that finds the exact opposite of San 2005, Barber, Lee, Liu, and Odean report individual investors lose when trading with individuals. This finding, which fits with previous work much more than San's surprise finding, is based on stock trades in Taiwan from 1995 to 1999.
From the paper:
"The trade data include the date and time of the transaction, a stock identifier, order type (buy or sell), transaction price, number of shares, and the identity of the trader. The trader code allows us to broadly categorize traders as individuals, corporations, dealers, foreign investors, and mutual funds. The majority of investors (by value and number) are individual investors."Not surprisingly, this is many many many trades: "For the five-year period, ...more than 500 million buys and 500 million sales."
"On each day for each stock, we sum the value of buys made by a particular investor
group (corporations, dealers, foreigners, mutual funds, or individuals). The intraday return on these purchases is calculated as the ratio of the closing price for the stock on that day to the average purchase price of the stock. On each day, we construct a portfolio comprised of those stocks purchased within the last ten trading days."
"Statistical tests are based on the monthly time-series of returns, where we calculate three measures of risk-adjusted performance. "1. "market-adjusted abnormal return by subtracting the return on a value-weighted index"
2. "estimate Jensen’s alpha by regressing the monthly excess return earned by each
investor group’s buy (or sell) portfolio on the market risk premium."
3. "...an intercept test using the four-factor model developed by Carhart (1997)." [these factors are "the return on a value-weighted portfolio of small stocks minus the return on a value-weighted portfolio of big stocks...the return on a value-weighted portfolio...of high book-to-market stocks minus the return on a value-weighted portfolio of low book to-market stocks, and...the return on a value-weighted portfolio of stocks with high recent returns minus the return on a value-weighted portfolio of stocks with low recent returns."
When trading with institutions, individuals systematically lose:
"Institutions appear to gain from trade, though the gains from trading reach anThis finding does fit existing theories on the informational advantages of instititions and once again reminds us that markets are not perfectly efficient. The question now appears to me more of how far from this perfect efficiency we lie.
asymptote at approximately six months (140 trading days). After one month (roughly 23 trading days), the stocks bought by institutions outperform those sold by roughly 80 basis points. After six months, stocks bought outperform those sold by roughly 150 basis points.
In contrast, stocks sold by individuals outperform those bought. The magnitude of the difference is smaller than for institutions since most trades by individuals are with other individuals and do not contribute to the difference in performance between stocks sold and stocks bought. The large gains by institutions map into small losses by individuals merely because individuals represent such a large proportion of all trades."
You will want to read this one. Very interesting!
Barber, Brad M., Lee, Yi-Tsung, Liu, Yu-Jane and Odean, Terrance, "Who Loses from Trade? Evidence from Taiwan" (January 2005). EFA 2005 Moscow Meetings Paper http://ssrn.com/abstract=529062