The trading response of individual investors to local bankruptcies

Christine Laudenbach, Benjamin Loos, Jenny Pirschel and Johannes Wohlfart

Journal of Financial Economics, 2021, vol. 142, issue 2, 928-953

Abstract: We examine how adverse local experiences that are uninformative of future returns affect households’ investment behavior in the short term. Using data from a German online brokerage and a survey, we show that retail investors sharply reduce risk taking in response to nearby firm bankruptcies. Adjustments in risk taking occur through immediate and transitory increases in trading, and work through more pessimistic expectations about aggregate stock returns and increased risk aversion. Changes in background risks or wealth effects cannot explain our findings. Extrapolation from local experiences to aggregate expectations is inconsistent with optimal use of full or limited information.

Keywords: Individual investors; Risk taking; Trading; Experiences (search for similar items in EconPapers)
JEL-codes: D14 G11 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:2:p:928-953

DOI: 10.1016/j.jfineco.2021.06.033

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