4. EMPIRICAL ANALYSIS
4.1 All Trading Activities
4.1.3 Performance
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4.1.3 Performance
Table 4.1.3 shows the performance of trading activities on TXF, MXF, EXF and FXF in different investor types from May, 2006 to December, 2008.
The results from Panel A of Table 4.1.3 indicates that round trips belong to institutional investors, including domestic institutions, proprietaries, and foreigners, have larger amount of profits or losses than individuals on average. Because the institutions own more funds, their positions would be larger. It causes their profits or losses of round trips are bigger than individuals’. In addition, we find that domestic institutions, individuals, and proprietaries prefer to hold larger losers than winners.
When facing losses, they are likely to hold for a long time. On the other hand, when facing gains, they would realize quickly. In contrast, foreigners are totally different from the other three investor types. We infer the reason is that foreigners are more rational and professional so that they will admit their faults and close their positions quickly.
Panel B of Table 4.1.3 presents that the average net profit by investor account in different investor types. The retail investors, including domestic institutions and individuals make losses on most futures contracts. This finding is consistent with previous studies.
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Performance of Round Trips and Net Profit
Table 4.1.3 primarily describes the performance of different round trip types and different investor types on TXF, MXF, EXF and FXF from May, 2006 to December, 2008.
In the Panel A, we calculate the mean profit of winner round trip and the mean loss of loser round trip for every investors. Then, we average the mean profit of winner round trip and mean loss of loser round trip by investor account for different investor types.To simplify the name of items, we use winner profit to represent the average the mean profit of winner round trip by investor account. Similarly, loser loss represents the average the mean loss of loser round trip by investor account. The unit of profit or loss is point.
In the Panel B, we calculate the average net profit by investor account for different investor types.
Panel A Round Trip Performance
Domestic Institutions 6,665.81 2,468.46 104.41 450.47 -7,967.95 -2,655.44 -314.61 -1,031.44 Individuals 965.76 644.30 43.19 111.23 -1,382.87 -898.65 -53.79 -224.36 Proprietaries 102,807.89 200,149.01 1,314.09 2,255.98 -131,839.10 -251,711.47 -1,914.10 -3,484.56
Foreigners 782,165.06 393,001.05 21,145.07 62,301.00 -762,955.37 -80,658.21 -16,130.95 -39,943.27 All 2,746.27 620.95 121.36 286.18 -2,695.80 1,064.82 -106.08 -357.37
There is something special to speak of. We can learn that the foreigners earn the appreciable profits in most futures contracts, except for EXF. However, compared with foreigners, proprietaries lose enormous amount of money on trading of TXF, MXF and FXF. As we know from previous researches, although both proprietaries and foreigners are professional and trade a lots on futures, their net trading profits are completely opposite. It appears that proprietaries obviously exhibit the overconfidence The
Panel B Performance
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possible reason is that the proprietaries and foreigners frequently hold opposite positions at the same time, but foreigners win at most of time. We also think that the points they hold long or short positions may cause different results. Because our sample period contains the period of financial crisis, the index probably go down sharply within a day and affect their net profits of positions. Therefore, we further discuss about whether investors behave differently owing to financial crisis.
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4.2 Trading Activities of Individuals by Volume 4.2.1 Descriptive Statistics
Table 4.2.1 illustrates the descriptive statistics of investors, trading volumes and round trips for individual investors on TXF, MXF, EXF and FXF.
To examine whether part of individuals trade professionally like institutions, we further divide individual investors into three groups by trading volumes. There are low, medium and high group. The last third of individual investors who have the lowest trading volumes are defined as low group. The second third of individual investors who have moderate trading volumes are defined as medium group. The top third of individual investors who have the highest trading volumes are defined as high group.
So, in the Panel A of Table 4.2.1, the number of investors of each of three groups is about equivalent.
As we expect, from Panel B of Table 4.2.1, high group has the highest number of trading volume and accounts for a large proportion of all individual trading volume.
The trading volume of high group is so far away from the other two groups. Due to this finding, we consider that high group trade more like institutions so that we expect that their trading behaviors will be more professional.
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Descriptive Statistics of Investors, Trading Volumes, and Round Trips for Different Individual Groups
Table 4.2.1 reports the descriptive statistics of investors, trading volumes and round trips for individuals on TXF, MXF, EXF and FXF from May, 2006 to December, 2008. We categorize individuals into three levels of groups by their trading volumes. High group means their trading volumes are the top third in all individual investors. The other two groups are medium and low. We also add the all of investors as a reference. All of investors means the all of individual investors during sample period.
In the Panel A, B and C, there are two parts every panel. One is for the number, the other is for the percentage.
The number of investors is the accounts in each of individual groups and the number of trading volume is the sum of the quantities of orders for every individual group. We count the number of round trips and categorize the round trips into winner round trips (Winners) and loser round trips (Losers) in different individual groups. Additionally, we calculate the percentage for investors and trading volume. The percentage of investor number for each of individual groups is the number of investors divided by the number of all individual investors. Likewise, the percentage of trading volume number for each of investor types is the number of trading volume divided by the number of all individual trading volume. There are two ways of calculating the percentage of round trip number.
For the individual groups, it is the number of round trip divided by all of individual round trips. However, for the round trip type, the percentage is that winner or loser round trips account for the total round trips in one individual group.
In the Panel D and E, there are average trading volume and average round trips for investors in different individual groups.
Panel A Number of Investors
Group Number of Investors Percentage of Investor Number
TXF MXF EXF FXF TXF MXF EXF FXF
Group Number of Trading Volume Percentage of Trading Volume
TXF MXF EXF FXF TXF MXF EXF FXF
Low 4,974,725 3,859,325 553,927 463,859 10.11% 18.23% 13.53% 13.42%
Medium 5,821,299 3,916,320 562,166 470,714 11.83% 18.49% 13.74% 13.62%
High 38,416,462 13,399,764 2,976,705 2,521,785 78.06% 63.28% 72.73% 72.96%
All 49,212,486 21,175,409 4,092,798 3,456,358 100.00% 100.00% 100.00% 100.00%
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Number of Round Trips Percentage of Round Trips
TXF MXF EXF FXF TXF MXF EXF FXF
Group Number of Trading Volume
TXF MXF EXF FXF
Group Number of Round Trips
TXF MXF EXF FXF
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We observe a reasonable consequence from Panel B and Panel C that there is a positive relationship between trading volume and round trip. Moreover, the results from Panel C of Table 4.2.1 indicate that difference of number between winner round trips and loser round trips increase as trading volume increases. For high and medium group, their winner round trips are obviously more than loser round trips. So, in the Panel D and E, we can obtain the same conclusion that the higher trading volume, the more round trips.
4.2.2 Disposition Effect
Table 4.2.2 shows the statistics on duration of winner round trip, duration of loser round trip, and disposition effect of different individual groups by trading volume on TXF, MXF, EXF and FXF from May, 2006 to December, 2008.
On average, we can learn from Panel A of Table 4.2.2 that the average durations of these three individual groups are about or lower than two days. Additionally, high group have the lowest amount of duration, followed by low and medium. This result means that investors in high group realize their positions quickly, no matter these positions are winners or losers. The possible reason is that most of individual investors in high group choose day trade strategy so that the average duration is relatively low.
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Disposition Effect of Different Individual Groups
Table 4.2.2 illustrates the disposition effect of different individual groups by trading volumes on TXF, MXF, EXF and FXF from May 2006 to December 2008.
In the Panel A, we calculate the mean winner round trip duration and mean loser round trip duration for every individual investor. Then, we separately average the mean winner round trip duration and the mean loser round trip duration by investor account for different individual groups. To simplify the name of items, we use winner duration to represent the average the mean winner round trip duration by investor account. Similarly, loser duration represents the average the mean loser round trip duration by investor account. The unit of duration is minute.
In the Panel B, we provide two method to evaluate whether the investors exhibit the disposition effect. If the winner duration is smaller than loser duration, it will show that the investor display the disposition effect. According to this, we use the difference duration between winner and loser and the duration ratio of winner to loser to test the existence of disposition effect. As a result, if the difference duration between winner and loser is negative, we will say that the investor exhibit disposition effect.
Likewise, if the duration ratio are smaller than one, we will regard that as the existence of disposition effect.
Difference Duration between Winner and Loser Duration Ratio of Winner to Loser
(3)
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The results of Panel B of Table 4.2.2 demonstrate that the individual investors in high group show less disposition effect on TXF and MXF. In contrast, the individual investors in low group exhibit less disposition effect on EXF and FXF. This consequence tell us that the individuals in high group are more rational on TXF and MXF, however, the investors in low group display more rationally on EXF and FXF.
Overall, the duration ratios of different individual groups are very close. It represents that trading behaviors of individuals are similar. They have tendency to realize losses than gains about 1.7 times. Even so, we still can discover that there is a relationship between trading volume and disposition effect. Comparatively, individual investors possessing higher trading volume would have weaker disposition effect, or more rational trading behaviors.
4.2.3 Performance
Table 4.2.3 describes the performance of trading activities on TXF, MXF, EXF and FXF in different individual groups from May, 2006 to December, 2008.
As the previous results of tables, because there is a positive relationship between number of round trip and trading volume, we can know that there would be a higher volume per round trip for each of the investors in high group. So, as we expect, we can obtain in Panel A of Table 4.2.3 that the profit or loss per round trip and trading volume have the similar positive relationship. Furthermore, the average size of profit or loss per round trip for high group is over several times than the other two individual groups. It appears that the investors who have higher trading volume will realize their positions as they accumulate a larger size of profit or loss.
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Performance of Round Trips and Net Profit for Different Individual Groups
Table 4.2.3 primarily describes the performance of different round trip types and different individual groups on TXF, MXF, EXF and FXF from May, 2006 to December, 2008.
In the Panel A, we calculate the mean profit of winner round trip and the mean loss of loser round trip for every investors. Then, we average the mean profit of winner round trip and mean loss of loser round trip by investor account for different individual groups. To simplify the name of items, we use winner profit to represent the average the mean profit of winner round trip by investor account. Similarly, loser loss represents the average the mean loss of loser round trip by investor account. The unit of profit or loss is point.
In the Panel B, we calculate the average net profit by investor account for different individual groups..
Panel A Round Trip Performance
In the Panel B of Table 4.2.3, there are a little different consequence from four kinds of futures contracts. Most of futures contracts, including TXF, EXF, and FXF, perform worse and worse when trading more frequently. There is a negative relationship between performance and trading volume. That is what we call “overconfidence”.
However, the performance of individuals is totally different on MXF. Their trading performance get more profitable with high trading volume. According to the findings, we can learn that the individual investors who trading a lot on MXF are professional like institutions. Even though both TXF and MXF target on the same index, the primary
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group trading them are completely different. It represents that MXF attracts more professional and institution-like individual investors. The reason why MXF appeal to most of individual investors is perhaps that the margin is comparatively low with other futures contracts so that they can reduce exposure risk of futures positions.
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5. Robustness
To understand whether financial crisis indeed cause the behavioral bias of investors, we further separate our sample period into two periods by the happening date of financial crisis, August 9, 2007. The earlier period shown on table is before, then the later one is after. Therefore, we will focus on the heterogeneity of behaviors in different investor types before and during financial crisis in this section.
5.1. Descriptive Statistics
Table 5.1 illustrates the descriptive statistics of investors, trading volumes and round trips for different investor types on TXF, MXF, EXF and FXF before or during financial crisis.
Because the financial market in Taiwan steadily develop, we can observe on Panel A of Table 5.1 that the number of investors in most of investor types, except for proprietaries, relatively grow up. In the Panel B of Table 5.1, the percentages of investor number in individuals and foreigners almost keep the same. However, the percentage of investor number in domestic institutions increase visibly. Instead, the percentage in proprietaries goes down apparently.
The results from Panel C and D of Table 5.1 are that trading volumes of different investor types are larger on most of contracts, including TXF, MXF and FXF. However, EXF is relatively unattractive for retail investors like domestic institutions and individuals. Maybe the reason is the crowding out effect of investment. Because of the budget limit, when you put more on some of contracts, the other contracts would be crowed out so that trading volume decrease. Overall, it appears that investors actively participate in trading during financial crisis. Due to the change of participation on contracts, there are a little different percentage allocations on four contracts. Most significant change of all are on EXF and FXF. Individual investors put more weight on
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FXF, but less on EXF. In contrast, proprietaries and foreigners put more weight on EXF, but less on FXF.
For the descriptive statistic of round trips in Panel E and F, we can find that all of round trips in four investor types grow up. Because of the financial crisis, all investors are afraid of any fluctuations in the market so that they trade frequently and create more round trips. Additionally, there are some change on the relationship between winner and loser round trips during financial crisis. We notice that the percentage of winner round trips on FXF in domestic institutions is reversely higher than loser round trips.
So do TXF in proprietaries and both MXF and EXF in foreigners. These results mean that there are performance biases caused by financial crisis in different investor types.
In the Panel E of Table 5.1, there are a clear increase on average trading volume in proprietaries and foreigners. This confirm our imagination of that relatively large institutions would have more trading volume during financial crisis. Because they believe their professional and have more funds to support, large institutions are likely to put more in the market. But for retail investors, namely domestic institutions and individuals, they have more concern about their investments so that their trading volume might increase or decrease on different futures contracts.
Due to the relationship we find previously between trading volume and round trips, we can obtain the similar result that most of investors trade more and have more round trips during financial crisis.
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Descriptive Statistics of Investors, Trading Volumes, and Round Trips Before or During Financial Crisis
Table 5.1 reports the descriptive statistics of investors, trading volumes and round trips in different investor types on TXF, MXF, EXF and FXF before or during financial crisis. In order to analyze the effect of financial crisis, we divide our sample period. The point we separate our sample period into two periods is August 9, 2007. We use before and after to stand for earlier period and later period. The investor types include domestic institutions, individuals, proprietaries, and foreigners. We also add the all of investors as a reference. All of investors means the total investors during sample period.
In the Panel A to F, we calculate both number and percentage for different investor types in two periods. The number of investors is the accounts in each of investor types and the number of trading volume is the sum of the quantities of orders for every investor type. We count the number of round trips and categorize the round trips into winner round trips (Winners) and loser round trips (Losers) in different investor type for two sample periods. If he round trips cross over August 9, 2007, we will put them to the earlier period. The reason is that we analyze the percentage of round trip which cross over is so low that we can neglect the effect. Additionally, we calculate the percentage for investors and trading volume. The percentage of investor number for each of investor types is the number of investors divided by the number of all investors. Likewise, the percentage of trading volume number for each of investor types is the number of trading volume divided by the number of all trading volume. There are two ways of calculating the percentage of round trip number. For the investor types, it is the number of round trip divided by all of round trips. However, for the round trip type, the percentage is that winner or loser round trips account for the total round trips in one investor type.
In the Panel G and H, there are average trading volume and average round trips for investors for different investor types in two sample periods. Panel B Percentage of Investor Number
Investor Type
Percentage of Investor Number
TXF MXF EXF FXF
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Individuals 2,632,695 4,900,441 1,313,728 4,560,752 418,157 425,091 288,704 417,366 Winner 1,544,017 2,823,303 763,688 2,575,663 262,513 264,340 178,065 258,568 Loser 1,088,678 2,077,138 550,040 1,985,089 155,644 160,751 110,639 158,798
Proprietaries 11,584 19,184 3,716 5,140 3,314 5,611 3,038 5,346
All 2,655,770 4,942,985 1,318,985 4,571,694 423,532 433,169 293,489 424,970 Winners 1,555,954 2,846,533 766,866 2,581,861 265,400 268,767 180,397 262,443 Losers 1,099,816 2,096,452 552,119 1,989,833 158,132 164,402 113,092 162,527
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Panel G Average Number of Trading VolumeInvestor Type
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Table 5.2 shows the statistics on duration of winner round trip, duration of loser round trip, and disposition effect of different individual groups by trading volume on TXF, MXF, EXF and FXF before or during financial crisis.
In the Panel A of Table 5.2, we focus on the change of duration in different investor types before and during financial crisis. For the individuals and proprietaries, both average winner round trip duration and average loser round trip duration are smaller during financial crisis. Because of the rapid change in the market, investors are likely to realize their positions quickly. However, the average winner round trip duration and average loser round trip duration have identical trend in the domestic institutions. Their average durations increase on most of contracts, except for TXF. The possible reason
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why durations increase is that because domestic institutions trade futures for hedge purpose, they need more time to be the complement of the losses on stocks or recover from losses of positions. Compared to other investor types, foreigners have different results in winner round trip duration and loser round trip duration. Their winner round trip duration is higher, but loser round trip duration is lower. We observe the trading activities of foreigners during financial crisis and find that the fleeting orders of foreigners increase. It means that more and more foreigners use program trading to replace previous trading method. By means of program trading, foreigners reduce the chance of holding losers and realizing winners.
The most important results in Panel B of Table 5.2 are that there are some changes
The most important results in Panel B of Table 5.2 are that there are some changes