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Tuesday, 6 September 2011

UWA Business School
When it comes to predicting the performance of stock markets, institutions and proprietary traders are acknowledged as having significant informational advantages. Despite this, a new study has found that - on the Stock Exchange of Thailand (SET) - these large traders are often outperformed by small, individual traders.

The study, conducted by Professor Sirimon Treepongkaruna, from The University of Western Australia Business School, along with researchers from Thailand and Canada, examined data from the SET between 1999 and 2004. Using a new technique that employed trade-weighted measures of buy and sell volumes, the researchers were able to separate investors' trading gains into gains that were due to market timing, versus gains due to security selection.

‘The trading performance of each investor type depends on market timing (more net buying prior to market upturns), as well as good stock selection (buying rather than selling stocks that outperform the market during the holding period),' explained Professor Treepongkaruna.

The researchers hoped to use the new technique discover whether the well-documented superior performance of foreign investors in emerging markets is due to good market timing, superior security selection, or both. In addition, the researchers compared the trading behaviours of individual investors, institutions, and proprietary traders.

‘An unexpected result is the finding that the trading strategies of institutions and proprietary traders lead to very inferior security selection, and thus very poor overall trading performance,' said Professor Treepongkaruna.

‘Institutions are mostly mutual funds and also tend to hold larger stocks. They do not trade very frequently, because one manager looks after many funds. Institutional managers therefore do not have time for frequent security selection adjustments, so security selection can suffer as a consequence.'

In contrast, individual traders were the most active traders, accounting for 80% of the trading volume and 70% of the trading value on the SET during the period of the study. Like institutions, individuals followed contrarian strategies, buying when the market fell and selling when the market rose.

‘Individual investors' herding behaviour leads to gains from security selection at the expense of all the other investor types, but their poor market timing cancels out these gains,' said Professor Treepongkaruna.

The behaviour of individual traders was markedly different to foreign investors, who showed good market timing but displayed no informational advantages when it came to security selection.

‘Foreign investors in the Thai stock market appear to have market timing (macro) informational advantages but no (micro) informational advantages over local investors with respect to security selection,' said Professor Treepongkaruna. ‘This is an important finding since it helps to explain contrasting results in the literature as to whether foreign investors actually do have informational advantages in emerging markets.'

The findings from this study, hope the researchers, will help to us to better understand the behaviours of different investors in emerging markets around the world.

Results from this study have been published in the Pacific-Basin Finance Journal. The study received funding through the Australian Research Council Discovery Projects scheme.

The article can be found at https://dx.doi.org/10.1016/j.pacfin.2011.07.004 .

Media references

Heather Merritt
Director, External Relations
UWA Business School
T: +618 6488 8171
M: 0419 950 027
E: [email protected]

Verity Chia
Communications Officer
UWA Business School
T: +618 6488 1346
E: [email protected]

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