Correlated Trading and Location

45 Pages Posted: 31 Jul 2003

See all articles by Lei Feng

Lei Feng

Harvard University - Business School (HBS)

Mark S. Seasholes

Arizona State University (ASU)

Date Written: December 2002

Abstract

This paper analyses the correlated trading behavior of stock market investors. We begin by documenting that the trades of individuals are significantly correlated (contemporaneously). This correlation increases dramatically if we condition on location. Investors who live near a firm's headquarters react in a similar manner to releases of public information. At the same time, investors who live far from the firm behave very differently from those who live nearby. We are able to make this identification by exploiting a unique feature of individual brokerage accounts in the People's Republic of China (PRC). Our data allow us to know exactly where an investor is at the time he or she places a trade (i.e., at which brokerage branch office). Since branch offices may be many kilometers apart, we are able to identify groups of investors who have the ability to talk amongst themselves and groups of investors who are not in contact with one another. This is a natural experiment with a laboratory-like design: if individual investors are influenced by others directly around them (a form of herd behavior) we should be able to detect it. Group-psychology, however, does not appear to be a predominant factor. Rather, the correlation of buys/sells within a geographic region (yet, across isolated branch offices) is highly significant at a weekly, and even daily, frequency.

Keywords: Individual Investors, Behavioral Finance, Herding

JEL Classification: G15, F3, D1

Suggested Citation

Feng, Lei and Seasholes, Mark S., Correlated Trading and Location (December 2002). Available at SSRN: https://ssrn.com/abstract=383082 or http://dx.doi.org/10.2139/ssrn.383082

Lei Feng (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Mark S. Seasholes

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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