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The IUP Journal of Applied Finance
Trading Behavior of Emerging Equity Market Investors
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This study examines the interdependencies and trading patterns among four categories of domestic investors, namely, institutional, retail, nominee and Proprietary Day Traders (PDTs), and explores the interactions between their daily net fund flows and domestic equity returns. To explore the interdependencies and trading patterns as well as the relations between domestic equity returns and net fund flows, the study employs bivariate vector autoregressive model and impulse response functions. The findings provide evidence that Malaysian equity market return influences the net fund flows of retail, nominee and PDTs investors. These categories of investors follow contrarian trading strategies whereby they trade in the opposite direction to equity market movement. Between the net fund flows of institutional and retail investors, the response of retail net fund flows to return shocks is greater. The findings of this study also demonstrate that there is a weak relationship running from net fund flows of domestic investors except that of net fund flows of PDTs towards Malaysian equity market return. However, the effect of PDTs’ net fund flows on domestic equity return is only in the short term, and thus this supports the concept of information dissemination, especially the price momentum. In conclusion, the findings of this study show that the Malaysian domestic equity investors behave distinctively in their trades in relation to the equity market performance.

 
 
 

Behavioral finance is among the research areas that receive wider attention from researchers lately. One of the areas that has been studied is the relationship between stock return and investors’ fund flows, of either institutional or retail investors, both local and foreign. Previous literature such as Sias and Starks (1997), Wermers (1999), Grinblatt and Keloharju (2000), Edelen and Warner (2001), Cai and Zheng (2004), Griffin et al. (2007), Ng and Wu (2007), Barber and Odean (2008), Bae et al. (2008), Lee et al. (2010), Hong and Lee (2011), Chiang et al. (2012), and Ahmed (2014) provide evidences that different types of investors display different trading behaviors in relation to the movements of stock market returns.

Basically, unlike other equity markets, most of the past studies that have examined investors’ trading behavior were carried out on developed market. With regard to emerging markets like Malaysian equity market, little research has been conducted, probably due to the constraints on the availability of similar data for this particular equity market. Thus, the objective of this paper is to fill this gap and provide insights on the domestic investors’ trading behavior of Malaysian equity market.

 
 
 

Applied Finance Journal, Trading Behavior, Emerging Equity Market Investors