Individuals have long been suspected to be noise traders. We seek empirical evidence of this and suggest individual trading weight as a proxy for noise trader risk. Based on a common stock sample of non-financial firms listed on the Korea Stock Exchange, we find that returns are higher for firms that are more densely traded by individual investors controlling for Fama and French’s (1993) 3 factors of market, firm size and valuation. Furthermore, the excess return of portfolios sorted by the proportion of individual traders is an influential risk characteristic even under asymmetric beta regimes. Lastly, tests using buy-sell imbalances and principal component analyses show that individuals generate systematic noise in the Korean stock market.
JEL Classification: G12, G15
Keywords: Noise trader risk; Individual trading weight; Buy-sell imbalance; Principal component analysis
