Market Composition Essay -- Global Finance, Investments

Over the past two decades, a panoply of behavioral finance research has been devoted to exploring the trading patterns of behavior and trading performance of individual and institutional investor categories over time and across exchanges. In fact, this intriguing research topic is of considerable interest to academic scholars and market practitioners alike, because it has great academic value and practical implications for industry. Specifically, capturing the trading pattern and investment performance of each investor group within a particular country can cast light on some worthwhile issues such as market composition, information transmission, asset price formation, and market efficiency and liquidity. Due, in part, to the information asymmetry evidenced between institutional investors and individual investors (e.g., Alangar et al., 1999; Lin et al., 2007; Duong et al., 2009), each group is more likely to have its unique characteristics. In their 2008 study, Kaniel et al. point out that institutional investors are by and large perceived to be better-informed rational traders, and to have a rather long-term investment perspective. In contrast, individual investors are generally viewed as unsophisticated traders, who prefer short-term investment horizons and are deeply involved in making sentiment-driven investment decisions based on their own cognitive biases. On the other hand, researchers working in the area of behavioral finance distinguish between two acknowledged trading patterns premised on investors' reactions to the past price movements of stocks. The first pattern of behavior is labeled as momentum investing or positive feedback trading, in which investors purchase (sell) a stock in anticipation of a further rise (d... ...kes (2011) report significant evidence that all three investor types – especially insurers – are more contrarian when selling than buying, which suggests that investors are reluctant to realize losses, in conformity with the evidence presented by Grinblatt and Keloharju (2001) and Odean (1998). More recently, Phansatan et al. (2012) examine the Stock Exchange of Thailand (SET) and find that individual and institutional investors appear to be contrarian traders as opposed to foreign investors who are shown to be positive feedback traders. Interestingly, the trading strategies of institutions in the Thai stock market lead to very inferior security section, and thus very poor overall trading performance. On the other hand, the trading behavior of individual investors brings about gains from security section, but their poor market timing counterbalances these gains.