Julia Henker

Do investors herd intraday in Australian equities

Purpose – The purpose of this research is to consider whether market wide herding occurs intraday. Design/methodology/approach – Using the 1995 Christie and Huang and the 2000 Chang et al. models, the paper tests whether market wide and industry sector herding occurs intraday in the Australian equities market. Findings – Neither market wide nor industry sector herding occurs intraday. Research limitations/implications – Both herding measures focus on one specific type of herding, herding evidenced by changes in the cross-sectional return distribution. Therefore the herding measures are ill suited to capture the effects of period specific abnormally high or low market returns and they can also capture herding of market participants or groups of market participants only in as far as it manifests itself in security specific returns. Originality/value – No previous studies have considered the possibility of intraday herding in equities markets. Even if there is little evidence of herding over longer time periods, market frictions and inefficiencies continue to be exploited at least anecdotally by traders with very short time horizons to the detriment of longer term investors.

Are retail investors the culprits? Evidence from Australian individual stock price bubbles

We address the question of whether the trading of retail investors causes stock price anomalies. Our intent is to study settings in which retail investors are most likely to have influence on market prices. Previous research suggests that retail investors have more influence in small capitalization stocks, and argues that retail investors are most likely to be irrational. Most theories of stock price anomalies hypothesize the presence of irrational traders. Consequently, we focus on stock price anomalies in primarily small capitalization stocks. Our data are from the Australian Stock Exchange Clearinghouse. The Australian stock market is characterized by a high level of direct stock holdings by individual investors, further enhancing the likelihood of retail investors’ influence. We investigate the Granger causality between investor category trading and stock prices, and display the relative trading volume of the investor categories. We conclude that retail investors are not responsible for stock mispricing. Since retail investors do not affect prices in this carefully selected environment, we infer that their trading is unlikely to influence stock market prices. Our conclusion has important implications for theories, particularly behavioral finance theories, that are dependent on the influence of retail investor trading in stock markets.

Retail Investors Exonerated: The Case of the January Effect

We dispel the belief that the January effect is due to retail investor trading. Previous studies suggest that retail investors, affected by behavioural biases and disproportionally invested in small capitalization stocks, are the source of the January effect. Furthermore, the literature regards retail investor trading and the tax‐loss selling hypothesis as essentially the same explanation. We separate tax implications and market capitalization to show that retail traders are not the cause of the January effect. Our study is an important direct test of whether retail trading causes market anomalies.

Effect of the ban on short selling on market prices and volatility

We examine the effects of the short-selling ban, imposed by Australian regulators in the wake of the global financial crisis, on the trading of financial stocks. Our findings argue against commonly stated reasons for imposing short-sale bans. We find no evidence that short-sale restrictions provide support for stock prices or that they reduce volatility. Moreover, stocks subject to the short-selling ban suffered a severe degradation in market quality. Controlling for the adverse effects of the financial crisis on markets, we show that short-selling restrictions increase intraday volatility, reduce trading activity and increase bid–ask spreads.

Asset legitimacy in experimental asset markets

We investigate whether prices in experimental asset markets behave differently when participants are required to trade with earned wealth compared to unearned wealth. Unearned endowed wealth, the standard practice in experimental studies of asset price bubbles, may elicit greater than normal risk-seeking behavior. We test for this altered behavior by requiring some participants to earn their initial market allocation. We do not find a significant difference in the frequency, severity, or duration of mispricing between earned and unearned endowments. Our results confirm the validity of the existing methodologies used in the study of bubbles in experimental settings.

How the Australian Ban on Short Selling During the GFC Affected Market Quality and Volatility

We examine the effects of the short selling ban, imposed by Australian regulators in the wake of the global financial crisis, on trading of financial stocks. Unlike other developed markets, where regulators imposed short-selling restrictions for brief periods of time at the height of the financial crisis, the ban on short selling of financial stocks on the Australian Stock Exchange lasted eight months, including both the tumultuous end of 2008 and the calmer period up to May 2009. Our control group consists of matched Canadian financial institutions which were unaffected by a short selling ban. We analyze the impact of the imposed short selling constraints on measures of market quality and on stock prices using univariate and multivariate fixed effects panel regressions. As predicted by previous theoretical work, we find that stocks subject to the short selling ban suffered a severe degradation in market quality. Controlling for the adverse effects of the financial crisis on financial markets, we show that imposing constraints on short-selling reduced trading activity, increased bid and ask spreads and increased intraday volatility. Moreover, there appears to be no evidence for lasting price support from the restrictions.

Survivorship Bias and Alternative Explanations of Momentum Effect

This paper provides the first detailed examination of momentum effect in Australian equity market. In contrast to previous research, we find that momentum effect has not been present in Australian market since late 1970s. We argue that previous research found strong momentum effect because they assumed perfect foresight of future delisting or acquisitions in the sampling process. In addition, we find that Fama and French three-factor model cannot explain the mean momentum returns although it can fully rationalize the returns on winners and losers portfolios. Our findings raise awareness in the literature that momentum effect is not robust to different sampling methods. We contribute an alternative explanation to momentum returns documented in existing literature. Momentum effect could be a product of look-ahead bias incurring from the sampling techniques. More importantly, we provide supports to the efficient market hypothesis at weak form.