Do investors put their money where their mouth is? Stock market expectations and investing behavior

TY - JOUR

T1 - Do investors put their money where their mouth is? Stock market expectations and investing behavior

AU - Merkle, Christoph

AU - Weber, Martin

PY - 2014/1/1

Y1 - 2014/1/1

N2 - To understand how real investors use their beliefs and preferences in investing decisions, we examine a panel survey of self-directed online investors at a UK bank. The survey asks for return expectations, risk expectations, and risk tolerance of these investors in three-month intervals between 2008 and 2010. We combine the survey data with investors' actual trading data and portfolio holdings. We find that investor beliefs have little predictive power for immediate trading behavior. The exception is a positive effect of increases in return expectation on buying activity. Portfolio risk levels and changes are more systematically related to return and risk expectations. In line with financial theory, risk taking increases with return expectations and decreases with risk expectations. In response to their expectations, investors also adjust the riskiness of assets they trade.

AB - To understand how real investors use their beliefs and preferences in investing decisions, we examine a panel survey of self-directed online investors at a UK bank. The survey asks for return expectations, risk expectations, and risk tolerance of these investors in three-month intervals between 2008 and 2010. We combine the survey data with investors' actual trading data and portfolio holdings. We find that investor beliefs have little predictive power for immediate trading behavior. The exception is a positive effect of increases in return expectation on buying activity. Portfolio risk levels and changes are more systematically related to return and risk expectations. In line with financial theory, risk taking increases with return expectations and decreases with risk expectations. In response to their expectations, investors also adjust the riskiness of assets they trade.

KW - Beliefs

KW - Expectations

KW - Portfolio choice

KW - Return

KW - Risk

KW - Trading behavior

UR - http://www.scopus.com/inward/record.url?scp=84904639965&partnerID=8YFLogxK

U2 - 10.1016/j.jbankfin.2014.03.042

DO - 10.1016/j.jbankfin.2014.03.042

M3 - Journal article

AN - SCOPUS:84904639965

SN - 0378-4266

VL - 46

SP - 372

EP - 386

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

IS - 1

ER -