The Impact of Expected and Unexpected Net Purchase of Institutional Investors—Reaction to Innovation and Correction for Overreaction
Date Issued
2008
Date
2008
Author(s)
Yeh, Li-Chi
Abstract
This article examines the influence of expected and unexpected order imbalance on stock price changes to investigate the market reaction toward institutional investors’ order imbalance and the impact of net purchase surprise in Taiwan’s stock market. We posit and show that the net purchases of institutional investors are serially correlated due to camouflage behavior and the conditional expected value of net purchase is not zero as conventionally considered in empirical papers. Utilizing this characteristic, we separate the net purchases into expected and unexpected components and document that market participants tend to overreact to institutional investors’ trades and the order imbalance surprises explain most of the variability of price changes.e also verify that, consistent with the notion that the institutional investors may be better informed from their deliberate analysis and the market tends to react to their trades, the correlation between order imbalance and returns is likely to be stronger than price-volume relationship in Taiwan’s stock market. Furthermore, we examine the impact of order imbalance on returns and find that the contemporary order imbalances are positively associated with price changes and return volatility. Moreover, after controlling the dates of the release of material fundamental information, our empirical results show that the institutional investors well incorporate new information and lead the market price changes.
Subjects
Order Imbalance
Institutional Investors
Information Asymmetry
Camouflage Behavior
Overreaction
Type
thesis
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