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Are individual or institutional investors the agents of bubbles?

Author

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  • Choi, Jongmoo Jay
  • Kedar-Levy, Haim
  • Yoo, Sean Sehyun

Abstract

Behavioral bubble models typically assume that uninformed trend-chasers, presumably individual investors, cause bubbles, while informed contrarian investors such as institutions, trade against bubbles. DeLong et al. (1990a) highlight that to be considered a “bubble”, the mis-pricing must prevail in a large, diversified portfolio. To meet this criterion, we use a unique dataset of all transactions by investor type for all non-financial Korean firms, and find evidence at odds with such assumptions. Domestic individual investors systematically apply aggressive contrarian trades, while foreign and some domestic institutions are mostly trend-chasers. These findings suggest that institutional investors rather than individuals are agents of bubbles.

Suggested Citation

  • Choi, Jongmoo Jay & Kedar-Levy, Haim & Yoo, Sean Sehyun, 2015. "Are individual or institutional investors the agents of bubbles?," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 1-22.
    • Handle: RePEc:eee:jimfin:v:59:y:2015:i:c:p:1-22
    DOI: 10.1016/j.jimonfin.2015.09.004
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    References listed on IDEAS

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    Cited by:

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    2. Agudelo, Diego A. & Múnera, Daimer J., 2023. "Who are the vectors of contagion? Evidence from emerging markets," International Review of Financial Analysis, Elsevier, vol. 87(C).
    3. Huang, Wenli & Zhu, Yuanhao & Li, Shi & Xu, Yueling, 2024. "Institutional investor heterogeneity and systemic financial risk: Evidence from China," Research in International Business and Finance, Elsevier, vol. 68(C).
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    5. Anh Le & Xiangkang Yin & Jing Zhao, 2022. "The Capitalization Effect of Imputation Credits on Expected Stock Returns," Abacus, Accounting Foundation, University of Sydney, vol. 58(3), pages 523-566, September.
    6. Rajesh Mohnot, 2020. "Examining Granger Causality in the Behavioral Reactions of Institutional Investors— Evidence from India," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(04), pages 1-21, January.

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    More about this item

    Keywords

    Foreign investors; Individual investors; Institutional investors; Trend-chasing; Contrarian; Behavioral bubbles;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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