Buying and Selling Behavior of Individual Investors in Option-like Securities

Schmitz, Philipp ; Weber, Martin

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URN: urn:nbn:de:bsz:180-madoc-16305
Document Type: Working paper
Year of publication: 2007
The title of a journal, publication series: None
Publication language: English
Institution: Business School > Sonstige - Fakultät für Betriebswirtschaftslehre
MADOC publication series: Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre (Weber) > Working Papers
Subject: 330 Economics
Classification: JEL: G1 ,
Subject headings (SWD): Privater Anleger , Verhalten , Verkauf , Kauf
Keywords (English): Individual Investors , Trading Behavior , Negative Feedback Trading , Disposition Effect , Bank-issued Warrants
Abstract: We analyze the trading behavior of individual investors in option-like securities, namely bank-issued warrants, and thus expand the growing literature of investors behavior to a new kind of securities. A unique data set from a large German discount broker gives us the opportunity to analyze the trading behavior of 1,454 investors, making 89,958 transactions in 6,724 warrants on 397 underlyings. In different logit regression, we make use of the facts that investors can speculate on rising and falling prices of the underlying with call and put warrants and that we also have information about the stock portfolios of the investors. We report several facts about the trading behavior of individual investors in warrants that are consistent with the literature on the behavior of individual investors in the stock market. The warrant investors buy calls and sell puts if the price of the underlying has decreased over the past trading days and they sell calls and buy puts if the price of the underlying has increased. That means, the investors follow negative feedback trading strategies in all four trading categories observed. In addition, we find strong evidence for the disposition effect for call as well as put warrants. The trading behavior is also influenced if the underlying reaches some exceptionally prices, e.g. highs, lows or the strike price. We show that hedging, as one natural candidate to buy puts, does not play an important role in the market for bank-issued warrants. The probability to buy calls is positively related to the holding of the underlying in the portfolio, meaning that investors tend to leverage their stock positions, while the relation between put purchases and portfolio holdings of the underlying is negative. Differences in the trading behavior in warrants with stock market indexes or single stocks as underlings are small.
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