Abstract
In this thesis I examine, within a behavioural finance framework, the impact
on stock prices of order and trade imbalance in three separate but related studies.
The first study, chapter two, begins with a question that plagues behavioural finance
theories do the investors most likely to be influenced by the behavioural biases
described in the literature, i.e., individual investors, affect stock prices? My data
enable me to consider the impact of net individual investor trading for the entire
market over several years. I find that net individual investor purchasing Granger causes
stock price changes. The correlation is negative, however, contradicting
common sense by demonstrating that individuals investor buying pressure makes
prices go down and selling pressure forces them up. More investigation is required.
Chapter three references order imbalance results from experimental finance. I use
field data to test a robust laboratory model and my modified versions. My findings
suggest that, with appropriate modifications, laboratory results can be applied to real
financial markets. Chapter four combines the data from the chapters two and three
to revisit the question of individual investor impact on stock prices. Other studies
have argued that individual investor influence is strongest in smaller capitalization
stocks. Moreover, various theories propose that individual investors are the driving
force behind the irrational stock prices of a bubble. I focus on the stocks from
chapter three, bubble stocks, and ask whether, in the context of the trading of the
entire market, individual investor trades are influential. Once again I find Granger causality,
but in the wrong direction. Moreover, the activity and volume of the
individual investor category of the holdings data is completely overshadowed by that of the two large investor categories, domestic and foreign institutions. I
conclude that individual investor trades are not influential in determining stock
prices. This conclusion has important implications for some behavioural finance
models of asset pricing. I suggest that emphasis might be better placed on educating
individual investors about the errors to which they are prone, rather than on trying to
explain market anomalies with those errors.