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FINANSMARK-Finansmarkedet

Individual Investors and Asset Prices

Alternativ tittel: Enkeltinvestorer og prisdynamikk i finansielle markeder

Tildelt: kr 0,90 mill.

Understanding how asset prices are determined is at the heart of financial economics. This project empirically analyzed the interplay between individual investor behavior and asset prices. It generated three papers. The first paper shows that the portfolio decisions of individual investors can be summarized by a few investor characteristics, in particular investor’s age and net worth. A portfolio constructed from taking a long position in stocks disproportionately held by older and wealthier investors and a corresponding short position in stocks held by young and less wealthy investors delivers high risk-adjusted returns relative to the market and established factor models. The second paper studies the impact of individual investors on stock prices. Although recent episodes in stock markets suggest individual investors may significantly move prices, there is little systematic evidence on their importance. Our findings show that households play an outsized role. Their ratio of impact to ownership surpasses that for other investor groups, including institutions, banks, foreign investors, and the government. The third paper revisits the portfolio efficiency of households by analyzing household portfolio efficiency in Nordic countries. We find that the average diversification losses across the countries are broadly similar. Household portfolios have approached the efficient frontier in recent years. These results have implications for the equity premium attainable by the households that do not participate in the risky asset market.

The main contribution of this project is on shedding new light on whether and how individual investors affect asset prices. This contribution has implications for academics, individual investors, asset managers, and policy makers. The work on investor factors, drivers of volatility, and household portfolio efficiency inform academics about the drivers of asset prices and household investment decisions. These drivers are also important inputs for individual investors and asset managers in their investment decisions and for regulators in their attempts in setting optimal policy. All in all, the project’s results inform us about how financial markets function and their consequences for households.

Recent work documents a great degree of heterogeneity in household portfolio choice. Because this variation is difficult to square with the assumptions embedded in leading asset pricing models, it may contribute to the failure of these models in explaining asset prices. What drives the heterogeneity in household financial portfolios and how it influences asset prices, risk sharing, and wealth inequality are, however, open questions. We fill this gap by assembling a globally unique dataset that covers all transactions made by all investors in the Norwegian stock and mutual fund market for over two decades. These data allow us to jointly characterize the investors, the assets they hold, and the prices of these assets. Our project is concerned with the following questions: How important are individual investors for determining asset prices? Which investor characteristics drive heterogeneity in investor behavior? How do investor characteristics interact with asset characteristics in determining which assets investors buy? How do individual investors contribute and react to asset price fluctuations? How does heterogeneity in individual investor behavior affect wealth inequality?

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FINANSMARK-Finansmarkedet