Do the diversification choices of individual investors influence stock returns?

Research output: Contribution to journalArticle

17 Citations (Scopus)

Abstract

This paper shows that the diversification choices of individual investors influence stock returns. A zero-cost portfolio that takes a long (short) position in stocks with the least (most) diversified individual investor clientele generates an annual, risk-adjusted return of 5-9%. This spread reflects the combined effects of sentiment-induced mispricing, narrow risk framing, and asymmetric information, where the sentiment effect is the strongest. Furthermore, the influence on returns is stronger among smaller, low institutionally owned, and hard-to-arbitrage stocks. These results are robust to concerns about relatively short sample size, improper factor model specification, slow information diffusion, and high transactions costs.

Original languageEnglish (US)
Pages (from-to)362-390
Number of pages29
JournalJournal of Financial Markets
Volume10
Issue number4
DOIs
StatePublished - Nov 2007
Externally publishedYes

Fingerprint

Diversification
Individual investors
Stock returns
Sentiment
Sample size
Information diffusion
Arbitrage
Mispricing
Risk-adjusted returns
Clientele
Costs
Transaction costs
Asymmetric information
Model specification

Keywords

  • Arbitrage costs
  • Individual investors
  • Information asymmetry
  • Investor sentiment
  • Narrow risk framing
  • Under-diversification

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Do the diversification choices of individual investors influence stock returns? / Kumar, Alok.

In: Journal of Financial Markets, Vol. 10, No. 4, 11.2007, p. 362-390.

Research output: Contribution to journalArticle

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