Individual Investor Trading in Leverage Products - Risk Appetite and Positioning Around Earnings Announcements

Abstract

We study the trading behavior of individual investors in leverage bank-issued products around earnings announcements. The trading activity increases substantially around earnings announcements. Aggregated individual investor trading is strongly correlated, both pre- and post event. We find intense aggregate positive positioning ahead of earnings announcements, irrespective of the direction of the subsequent earnings surprise. Thus, individual investors are subject to an "optimism bias". The risk appetite of individual investors increases in the run-up to earnings announcements. We find that neither pre-event risk appetite nor pre-event imbalances can be attributed to informed trading. We attribute the increased risk appetite to investor overconfidence. Overall, individual investor trading in leverage products is not particularly skillful.

Keywords: Individual Investors, Leverage Products, Earnings Announcements, Risk Preferences, Imbalances

JEL Classification: G10, G14