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SESSION VII-1 : INVESTMENT BEHAVIOR (19/12/2008 à 14h00)

Individual Investors and Volatility Abstract

Auteurs : FOUCAULT Thierry & THESMAR David (HEC School of Management Paris); SRAER David (University of California, Berkeley)

Intervenants : FOUCAULT Thierry (HEC School of Management Paris)

We test the hypothesis that retail trading contributes to the idiosyncratic volatility of stock returns. To this end, we consider a reform of the French equity market that restrains individual investors’ ability to short-sell or buy on margin a subset of stocks listed on this market. Using differences-in-differences estimates, we find a significant reduction in return volatility for stocks affected by the reform. For these stocks, we also find a significant decrease in (i) the magnitude of returns reversals, and (ii) the Amihud ratio after the reform. We show that these findings are predicted by theories of noise trading. Overall, the findings support the view that retail trading has a positive impact on idiosyncratic volatility because individual investors are noise traders.

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On the Information Content of the Order Flow: An Experiment

Auteurs : BISIERE Christophe & DECAMPS Jean-Paul (Toulouse School of Economics and IAE); LOVO Stefano(HEC School of Management Paris)

Intervenants : BISIERE Christophe (Toulouse School of Economics (IDEI) and IAE (CRG)) bisiere@univ-tls

We report results of a series of experiments that simulates trading in financial market. The specific format of our experiment allows to unambiguously measure the information content of the order flow and to disentangle the impact that risk attitudes and belief updating rules have on market informational efficiency. On the one hand, we show that many of the so called “irrational” behaviors are not so if one
takes into account subjects’ risk attitude. On the other hand we find evidence of non-Bayesian updating of beliefs. Risk neutral subjects are rare and subjects displaying risk aversion or risk loving tend to ignore private information when their prior beliefs on the asset fundamentals are strong. This behavior implies that when the market has a sharp opinion on an asset fundamental value, the private information dispersed in the economy struggles to enter trading prices. Non-Bayesian belief updating has an ambiguous effect on market efficiency as it reduces (improves) the information flow when subject prior belief is weak (strong).

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Rational bubbles: an experiment

Auteurs : MOINAS Sophie & Sebastien POUGET (Toulouse School of Economics)

Intervenants : MOINAS Sophie (Toulouse School of Economics)

This paper studies bubbles in the laboratory. Starting with Smith, Suchanek and Williams (1988), many researchers focus on irrational bubbles. We complement this literature and design an experimental setting where bubbles can be made rational or irrational by varying one parameter. Our setting features sequential trading and sustains rational bubbles because traders are not sure to be last in the market sequence. Our analysis shows that it is pretty difficult to coordinate on rational bubbles even in an environment where irrational ones flourish.

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