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Utilizing a comprehensive data set on daily holdings of Finnish stocks, this paper examines momentum trading and herding of active vs. passive investors during the information technology (IT) stock bubble period of 1997-2000. Modern stock markets are characterized with tremendous amount of trading. Still the market participants are highly heterogeneous in terms of their trading activity. Employing a number of trading days as a measure of trading activity, we segregate investor population into ten activity categories. After aggregating these categories into larger investor groups, our aim is to compare trading styles of these contrasting activity groups. In the theoretical literature, it is often found that momentum trading and herding can potentially destabilize asset markets, therefore, our focus is on these specific trading styles. We find that particularly large active investors engage in momentum trading. Active investors as a group also tend to herd in their trading decisions. Furthermore, their herding tendency is increasing monotonically year on year. Buy pressures of active investors are positively associated with contemporaneous daily returns, implying either price pressures caused by their trading or intraday momentum trading. Passive investors' and small active investors' trading styles, on the other hand, exhibit contrarian fashion. Moreover, the passive investors' herding tendency is very strong over the sample period. Their buy pressures are negatively associated with contemporaneous returns. Finally, neither trading of active investors nor trading of passive investors seem to have predictive ability on returns. Our results are consistent of large active investors being contributors to the recent price bubble. Thus, active trading might not have solely positive effects on the efficiency of asset markets. |
