The Interaction between the Return And Buying Appetite of Investors

The aim of this paper is to explore the relationship between trading behaviors of individual investors and their previous day portfolio return. We try to find which one of the following two contradicting biases dominates the investor behavior: Namely, overconfidence and disposition effect. In order to explore the direction of this relationship, daily transactions of individual investors who trade in Borsa Istanbul between 2008 and 2012 (five years) are analyzed according to several variables such as portfolio size, gender, and age. To do this, we measure buying appetite with the widely used ‘buy-sell imbalance’ which is the ratio of net buying value to the total trading value of investors. Then we explore whether there is a relationship between buying appetite and the previous day portfolio return. The main finding is that there is a strong evidence on the dominance of disposition effect and buying appetite is found to be significantly smaller when the portfolio return increases. The other findings re as follows: (1) Large individual investors (individuals with high portfolio size) have higher buying appetite than that of small investors independent from portfolio returns. (2) Gender has a significant influence on the buying appetite. Male investors have higher buying appetite than their female counterparts. (3) The age and buying appetite are negatively correlated.