How Do Institutional Investors Trade

42 Pages Posted: 1 Jul 2004

See all articles by Paul G.J. O'Connell

Paul G.J. O'Connell

FDO Partners, LLC

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business

Date Written: March 2004

Abstract

Using a novel and detailed custody trades dataset, this paper analyzes the trading behavior of institutions. Extant studies have examined the effects of past performance on trading by retail investors, day traders, and futures floor traders. Yet very little work has been done on institutions. We find that unlike other investors, institutions take on more risk following an increase in net profit and loss. However, the responses to a gain and loss are highly asymmetric. Institutions aggressively reduce risk in the wake of losses, but only mildly increase risk in the wake of gains. This asymmetry is more pronounced for experienced and older funds. Further, the performance dependence varies over the calendar year, and manifests itself at the security but not at the portfolio level. We relate these findings to the behavioral theories of narrow framing, dynamic loss aversion, and overconfidence.

Keywords: Institutional investors, overconfidence, loss aversion

JEL Classification: G10, G11

Suggested Citation

O'Connell, Paul G.J. and Teo, Melvyn, How Do Institutional Investors Trade (March 2004). Available at SSRN: https://ssrn.com/abstract=559414 or http://dx.doi.org/10.2139/ssrn.559414

Paul G.J. O'Connell

FDO Partners, LLC ( email )

5 Revere Street
Cambridge, MA 02138
United States
617-864-3364 (Phone)
617-864-5548 (Fax)

Melvyn Teo (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828 0735 (Phone)
+65 6822 0777 (Fax)

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