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Open AccessArticle

Institutional Investors’ Trading Response to Stock Market Anomalies: Evidence from Korea

1
School of Business, Yeungnam University, 280 Daehak-Ro, Gyeongsan, Gyeongbuk 38541, Korea
2
DGB Research Institute, 111, Oksan-ro, Buk-gu, Daegu 41593, Korea
3
Department of Finance, College of Business, Hallym University, Chuncheon 24252, Korea
*
Author to whom correspondence should be addressed.
Sustainability 2020, 12(4), 1420; https://doi.org/10.3390/su12041420 (registering DOI)
Received: 5 January 2020 / Revised: 11 February 2020 / Accepted: 13 February 2020 / Published: 14 February 2020
(This article belongs to the Section Economic, Business and Management Aspects of Sustainability)
This study examines whether institutions are sophisticated investors that exploit stock characteristics known to predict future returns in Korea, using data from 2000 to 2018. We analyze the institutional demand, measured as a change in institutional ownership, for stocks with eight well-known anomalies as well as the future abnormal returns of institutional trading. We find that, generally, institutions do not trade consistently with stock anomaly predictions because they are reluctant to hold both highly overvalued and highly undervalued stocks. Although they use a few anomalies, they use these characteristics passively to avoid stocks known to underperform rather than to pick stocks known to outperform. Furthermore, the positive returns on long-legs are concentrated on stocks sold by institutions, while the negative returns on short-legs are concentrated on stocks bought by them. Our finding casts doubt on the widely-accepted notion that institutions are skilled investors and that institutional arbitrage trading corrects any mispricing in the market. To the contrary, institutions’ loss-averse trading behaviors cause or magnify mispricing. View Full-Text
Keywords: anomaly; institutional investor; institutional ownership; Korean stock market; loss aversion anomaly; institutional investor; institutional ownership; Korean stock market; loss aversion
MDPI and ACS Style

Kim, J.; Ok, Y.; Park, Y.J. Institutional Investors’ Trading Response to Stock Market Anomalies: Evidence from Korea. Sustainability 2020, 12, 1420.

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