IDEAS home Printed from https://ideas.repec.org/a/pal/assmgt/v18y2017i6d10.1057_s41260-017-0047-6.html
   My bibliography  Save this article

Extreme risk and small investor behavior in developed markets

Author

Listed:
  • Lorne N. Switzer

    (Concordia University)

  • Jun Wang

    (University of Western Ontario)

  • Seungho Lee

    (Concordia University)

Abstract

This paper examines the responses of small investors of ten developed markets as they are exposed to extreme risk. We focus on mutual fund flows that are induced by extreme market episodes (measured daily, weekly, and monthly) versus volatile periods captured by the traditional standard deviation metric. The extreme-day measure captures the behavior of small retail investors in the US and Canada better than the traditional standard deviation measure, based on funds flows to equity mutual funds. The evidence for the other countries of the study is mixed. Small investors in countries in the G-7 with more collective (as opposed to individualistic) cultures show less responses to changes in risk.

Suggested Citation

  • Lorne N. Switzer & Jun Wang & Seungho Lee, 2017. "Extreme risk and small investor behavior in developed markets," Journal of Asset Management, Palgrave Macmillan, vol. 18(6), pages 457-475, October.
    • Handle: RePEc:pal:assmgt:v:18:y:2017:i:6:d:10.1057_s41260-017-0047-6
    DOI: 10.1057/s41260-017-0047-6
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41260-017-0047-6
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/s41260-017-0047-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eric Girard & Rita Biswas, 2007. "Trading Volume and Market Volatility: Developed versus Emerging Stock Markets," The Financial Review, Eastern Finance Association, vol. 42(3), pages 429-459, August.
    2. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 73-92.
    3. Frazzini, Andrea & Lamont, Owen A., 2008. "Dumb money: Mutual fund flows and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 88(2), pages 299-322, May.
    4. Spiegel, Matthew & Zhang, Hong, 2013. "Mutual fund risk and market share-adjusted fund flows," Journal of Financial Economics, Elsevier, vol. 108(2), pages 506-528.
    5. George Cashman & Federico Nardari & Daniel Deli & Sriram Villupuram, 2014. "Investor behavior in the mutual fund industry: evidence from gross flows," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(4), pages 541-567, October.
    6. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
    7. Namwon Hyung & Casper G. de Vries, 2005. "Portfolio Diversification Effects of Downside Risk," Tinbergen Institute Discussion Papers 05-008/2, Tinbergen Institute.
    8. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    9. Charles P. Jones & Mark D. Walker & Jack W. Wilson, 2004. "Analyzing Stock Market Volatility Using Extreme‐Day Measures," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(4), pages 585-601, December.
    10. Ivkovic, Zoran & Weisbenner, Scott, 2009. "Individual investor mutual fund flows," Journal of Financial Economics, Elsevier, vol. 92(2), pages 223-237, May.
    11. DiTraglia, Francis J. & Gerlach, Jeffrey R., 2013. "Portfolio selection: An extreme value approach," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 305-323.
    12. Turan G. Bali, 2003. "An Extreme Value Approach to Estimating Volatility and Value at Risk," The Journal of Business, University of Chicago Press, vol. 76(1), pages 83-108, January.
    13. Longin, Francois M, 1996. "The Asymptotic Distribution of Extreme Stock Market Returns," The Journal of Business, University of Chicago Press, vol. 69(3), pages 383-408, July.
    14. Mark Grinblatt & Matti Keloharju, 2001. "How Distance, Language, and Culture Influence Stockholdings and Trades," Journal of Finance, American Finance Association, vol. 56(3), pages 1053-1073, June.
    15. Namwon Hyung, 2005. "Portfolio Diversification Effects of Downside Risk," Journal of Financial Econometrics, Oxford University Press, vol. 3(1), pages 107-125.
    16. Eun, Cheol S. & Wang, Lingling & Xiao, Steven C., 2015. "Culture and R2," Journal of Financial Economics, Elsevier, vol. 115(2), pages 283-303.
    17. Brad M. Barber & Terrance Odean & Lu Zheng, 2005. "Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2095-2120, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lorne N. Switzer & Cagdas Tahaoglu & Yun Zhao, 2017. "Volatility measures as predictors of extreme returns," Review of Financial Economics, John Wiley & Sons, vol. 35(1), pages 1-10, November.
    2. Ahmed Naeem & Sarfraz Mudassira, 2018. "Stock Market Volatility Measure Using Non-Traditional Tool Case of Germany," Economics and Business, Sciendo, vol. 32(1), pages 126-135, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bailey, Warren & Kumar, Alok & Ng, David, 2010. "Behavioral Biases of Mutual Fund Investors," Working Papers 10-23, University of Pennsylvania, Wharton School, Weiss Center.
    2. Hu, May & Chao, Chi-Chur & Lim, Jin Hao, 2016. "Another explanation of the mutual fund fee puzzle," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 134-152.
    3. Bailey, Warren & Kumar, Alok & Ng, David, 2011. "Behavioral biases of mutual fund investors," Journal of Financial Economics, Elsevier, vol. 102(1), pages 1-27, October.
    4. Itzhak Venezia, 2018. "Lecture Notes in Behavioral Finance," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 10751, June.
    5. Rakowski, David & Yamani, Ehab, 2021. "Endogeneity in the mutual fund flow–performance relationship: An instrumental variables solution," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 247-271.
    6. Galla Salganik-Shoshan, 2016. "Investment flows: Retail versus institutional mutual funds," Journal of Asset Management, Palgrave Macmillan, vol. 17(1), pages 34-44, January.
    7. Kronlund, Mathias & Pool, Veronika K. & Sialm, Clemens & Stefanescu, Irina, 2021. "Out of sight no more? The effect of fee disclosures on 401(k) investment allocations," Journal of Financial Economics, Elsevier, vol. 141(2), pages 644-668.
    8. Yaping Xiao & Haishu Qiao & Ting Xie, 2019. "Open-End Funds for Sustainable Economic Growth in China: The Relationship between Load Fees, Performance, and Flows," Sustainability, MDPI, vol. 11(22), pages 1-27, November.
    9. George J. Jiang & H. Zafer Yüksel, 2019. "Sentimental mutual fund flows," The Financial Review, Eastern Finance Association, vol. 54(4), pages 709-738, November.
    10. David Hirshleife, 2015. "Behavioral Finance," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 133-159, December.
    11. Espenlaub, Susanne & Haq, Imtiaz ul & Khurshed, Arif, 2017. "It's all in the name: Mutual fund name changes after SEC Rule 35d-1," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 123-134.
    12. Tekçe, Bülent & Yılmaz, Neslihan & Bildik, Recep, 2016. "What factors affect behavioral biases? Evidence from Turkish individual stock investors," Research in International Business and Finance, Elsevier, vol. 37(C), pages 515-526.
    13. Florian Röder & Andreas Walter, 2019. "What Drives Investment Flows Into Social Trading Portfolios?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 42(2), pages 383-411, July.
    14. Omori, Kozo & Kitamura, Tomoki, 2023. "Investor response to Morningstar's ratings, category information, and alpha in the Japanese mutual fund market," International Review of Financial Analysis, Elsevier, vol. 89(C).
    15. Solomon, David H. & Soltes, Eugene & Sosyura, Denis, 2014. "Winners in the spotlight: Media coverage of fund holdings as a driver of flows," Journal of Financial Economics, Elsevier, vol. 113(1), pages 53-72.
    16. Servaes, Henri & Sigurdsson, Kari, 2022. "The Costs and Benefits of Performance Fees in Mutual Funds," Journal of Financial Intermediation, Elsevier, vol. 50(C).
    17. Marshall, Ben R. & Nguyen, Hung T. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat & Young, Martin, 2021. "Do climate risks matter for green investment?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    18. Wang, Wenzhao & Duxbury, Darren, 2021. "Institutional investor sentiment and the mean-variance relationship: Global evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 415-441.
    19. Thorp, S. & Bateman, H. & Dobrescu, L.I. & Newell, B.R. & Ortmann, A., 2020. "Flicking the switch: Simplifying disclosure to improve retirement plan choices," Journal of Banking & Finance, Elsevier, vol. 121(C).
    20. Shinozawa, Yoshikatsu & Vivian, Andrew, 2015. "Determinants of money flows into investment trusts in Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 37(C), pages 138-161.

    More about this item

    Keywords

    volatility; extreme risk; small investor behavior;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:assmgt:v:18:y:2017:i:6:d:10.1057_s41260-017-0047-6. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.