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Assessing Investor Belief: An Analysis of Trading for Sustainable Growth of Stock Markets

Yan Han, Xue-Feng Shao, Xin Cui, Xiaoguang Yue (), Kelvin Joseph Bwalya and Otilia Manta ()
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Yan Han: School of Humanities and Social Science, Beijing Institute of Technology, Beijing 100081, China
Xue-Feng Shao: Business School, University La Trobe Sydney Campus, Sydney, NSW 2000, Australia
Xin Cui: Business School, University of International Business and Economics, Beijing 100029, China
Kelvin Joseph Bwalya: School of Consumer Intelligence and Information System, University of Johannesburg, APK Campus, Johannesburg 2006, South Africa

Sustainability, 2019, vol. 11, issue 20, 1-18

Abstract: Investors’ beliefs are the driving force behind the trading of stocks and, hence, sustainable stock returns. Although investors’ beliefs are usually unobservable, this study develops a new approach to estimate investors beliefs. Following well-established rational learning and market microstructure models, it is assumed that informed traders submit market orders according to their beliefs, whereas market makers/uninformed traders make Bayesian inferences about the informed traders’ private signals after observing the total order flows. By fitting intraday transaction data to this model, we can estimate the daily belief uncertainties of informed and uninformed investors; this estimation is performed on S&P 500 stocks. The belief parameters estimated by this approach have incremental explanatory power to bid-ask spreads. The findings show that market makers’ belief uncertainty plays a more important role in determining sustainable stock returns than informed traders’. Implications of these findings include: (a) the larger market maker group is influencing the market trends; (b) this dominant group is making decisions based on diverse types of data; and (c) increased understanding of the diversity of belief parameters may facilitate strategies to enhance sustainable returns, however, stock trading is still significantly influenced by emotive factors worthy of further research.

Keywords: investors’ beliefs; information asymmetry; liquidity; stock trading; stock returns (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
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