Abstract
This thesis consists of three standalone studies on investor heterogeneity and asset pricing. The first study investigates investors’ trading behaviour and prospect theory value in the Korean equity market. It shows that prospect theory values and stock returns are positively related. This relationship is stronger in the subsample of stocks dominated by retail investors. Using monthly investor flows data from 2004 to 2015, I find that retail investors are net buyers of stocks with a low probability of extreme negative returns. Institutional investors and foreign investors take the other side of retail investors’ trades. Overall, this study provides new evidence that retail investors’ contrarian trading drives the prospect theory–return relationship in the Korean equity market.
The second study examines the performance of the overnight momentum, intraday momentum, and cross-period reversals in the Korean equity market. It shows that stocks that are past overnight (intraday) winners continue to outperform past overnight (intraday) losers in the following overnight (intraday) periods. The same overnight- (intraday-) momentum strategy, however, suffers reversals during the subsequent intraday (overnight) periods. The analysis of the trading flows reveals that retail investors’ attention-driven trading behaviour drives these phenomena during the sample period and the different market states (up-, down). However, during the global financial crisis (GFC), retail investors’ overnight momentum trading behaviour reduces, indicating that their attention-driven trading is affected by significant market shocks.
The third study reveals that the 52-week high effect persists in the New Zealand equity market. Moreover, the 52-week high trading strategy returns are economically higher for stocks with positive earnings surprises. This finding suggests that investors' anchoring to a 52-week high price is amplified in the presence of positive earnings surprises. The trade flow analysis reveals that retail investors are net sellers of stocks with positive earnings surprise and trading near their 52-week high, albeit their trading is not statistically significant. Institutional investors are the net buyers of stocks with positive earnings surprise traded near their 52-week high. Overall, our results are consistent with investor heterogeneity driving a 52-week high anomaly. Collectively this thesis offers compelling evidence on the role of retail investors in driving persistent return patterns in the financial markets. The findings in the thesis have important implications for academics, traders, and regulators of financial markets.