Are Individual or Institutional Investors the Agents of Bubbles?
43 Pages Posted: 17 Mar 2012 Last revised: 6 Aug 2016
Date Written: July 17, 2015
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.
Keywords: trend-chasing, contrarian, behavioral bubbles, individual vs. institutional investors, foreign investors
JEL Classification: G11, G15
Suggested Citation: Suggested Citation