Why do investors trade more following high returns?

Abstract

We investigate investors’ trading behavior in response to gains and losses at the stock, style, and market levels by testing the various implications of seven trading theories. Using all U.S. stocks from July 1963 to June 2021 as a sample, we obtain several important stylized facts. First, investors trade more actively following high returns at various levels. Second, investors trade more frequently subsequent to high returns during high market-uncertainty periods than during low market-uncertainty periods. Third, investors increase their trading drastically after observing positive returns, but decrease their trading only mildly after observing negative returns. Fourth, individual investors trade more actively following positive returns than institutional investors. Fifth, investors are less motivated to trade following high returns in the recent period after the exogenous events, such as the reductions in the minimum tick size. Overall, these stylized facts are consistent with the theoretical predictions of disposition effects and overconfidence.