Corvinus
Corvinus

Do Individual Investors Consciously Speculate on Reversals? Evidence from Leveraged Warrant Trading

Farkas, Miklós and Váradi, Kata (2017) Do Individual Investors Consciously Speculate on Reversals? Evidence from Leveraged Warrant Trading. Working Paper. Corvinus University of Budapest, Department of Finance.

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Abstract

Using proprietary data on bank-issued knock-out warrants, we find that individual investors, on aggregate, bet on price reversals. In a simple model we demonstrate that a mechanical channel due to market and product characteristics may account for investors' betting on reversals, even if investors' purchasing and selling decisions are independent of past returns. Our empirical results suggest that the mechanical channel can explain almost one half of the associationbetween past returns and individual investors' order flow, while the rest can be attributed to the disposition effect, that is, investors' higher propensity to sell assets from their portfolios that have appreciated.

Item Type:Monograph (Working Paper)
Uncontrolled Keywords:individual investor behavior, disposition effect, leveraged warrant trading, price reversal speculation
JEL classification:G20 - Financial Institutions and Services: General
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G23 - Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
Subjects:Finance
ID Code:3303
Deposited By: Ádám Hoffmann
Deposited On:24 Jan 2018 16:25
Last Modified:24 Jan 2018 16:25

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