Over the past two decades, a panoply of behavioral finance research has been devoted to exploring the trading patterns of behavior and trading performance of individual and institutional investor categories over time and across exchanges. In fact, this intriguing research topic is of considerable interest to academic scholars and market practitioners alike, because it has great academic value and practical implications for industry. Specifically, capturing the trading pattern and investment performance of each investor group within a particular country can cast light on some worthwhile issues such as market composition, information transmission, asset price formation, and market efficiency and liquidity.
Due, in part, to the information asymmetry evidenced between institutional investors and individual investors (e.g., Alangar et al., 1999; Lin et al., 2007; Duong et al., 2009), each group is more likely to have its unique characteristics. In their 2008 study, Kaniel et al. point out that institutional investors are by and large perceived to be better-informed rational traders, and to have a rather long-term investment perspective. In contrast, individual investors are generally viewed as unsophisticated traders, who prefer short-term investment horizons and are deeply involved in making sentiment-driven investment decisions based on their own cognitive biases.
On the other hand, researchers working in the area of behavioral finance distinguish between two acknowledged trading patterns premised on investors' reactions to the past price movements of stocks. The first pattern of behavior is labeled as momentum investing or positive feedback trading, in which investors purchase (sell) a stock in anticipation of a further rise (decline) in its price. That is, persistent increases (decreases) in a stock's market price would give indication that the stock is likely to maintain an upward (a downward) momentum, thereby bringing about purchase (sale) decision processes. The second pattern of behavior is known as contrarian investing or negative feedback trading, in which investors take a position opposite to the prevailing market trend. That is, they purchase past losers (i.e., downward momentum stocks) and sell past winners (i.e., upward momentum stocks).
Given the behavioral heterogeneity of investors in financial markets, numerous relevant studies indicate that each investor category has a distinctive pattern of trade and exhibits different trading performance characteristics (e.g., Grinblatt et al., 1995; Nofsinger and Sias, 1999; Griffin et al., 2003; Kamesaka et al., 2003; Wylie, 2005; Bae et al., 2006; Ng and Wu, 2007; Kaniel et al., 2008; Yu and Hsieh, 2010; Hong and Lee, 2011; Bae et al., 2011; De Haan and Kakes, 2011; Phansatan et al., 2012).
However, the empirical evidence found for different financial market settings appears to be somewhat inconsistent. For instance, Lakonishok et al. (1992) examine the trading patterns of 769 American...