Heliyon 7 (2021) e08583

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Heliyon
journal homepage: www.cell.com/heliyon

Research article

The performance of retail investors, trading intensity and time in the

market: evidence from an emerging stock market☆
Urbi Garay a, Fredy Pulga b, *
a
IESA Business School, Av. IESA, Edif. IESA, Urb. San Bernardino, Caracas, Venezuela
b
International School of Economic and Administrative Sciences (EICEA), Universidad de La Sabana, Campus del Puente del Común, Km 7., Chia, Cundinamarca,
Colombia

A R T I C L E I N F O A B S T R A C T

Keywords: We analyze all stock transactions executed by the universe of individual (or retail) investors of the Colombian
Household finance Stock Exchange (5,380,810 trades performed by 42,211 individual investors between 2006 and 2016). Retail
CAPM investors had negative abnormal returns on a gross excess return basis that ranged between 4% and 4.4% per year
Fama and French
(depending on whether the alpha was estimated using the CAPM, Fama-French model or Carhart model). When
Carhart
Underperformance and Colombia
transaction costs are considered, the underperformance of retail investors becomes even more pronounced, and
the most active traders perform worse than less active traders even on a gross excess return basis. The under-
performance of retail investors can be explained by their bad timing but only prior to the bankruptcy of Interbolsa,
the largest stock brokerage house in Colombia at the time (2012). Once we control for the number of trades and
other variables, we find that retail investors present in the market for a longer period of time and trading more
actively outperform the other investors (on both a gross and net basis).

1. Introduction We study the performance of retail investors in Colombia making use

of a unique dataset of transactions corresponding to 5,380,810 trades
Since the Global Financial Crisis of 2008-09, interest rates in many executed on behalf of 42,211 individual investors during the 2006–2016
countries have declined (in many cases, to record low levels). Over the period. The database covers the complete trading history of all retail
past few years, disruptive online brokers have introduced new stock (and investors in Colombia for this period. This is an advantage of our study
option) trading platforms to facilitate trading by retail (individual) in- relative to other research only using a sample of traders (for example,
vestors and, at the same time, have even offered zero trading commis- traders belonging to a certain brokerage house) to examine the perfor-
sions in recent years (Mihm, 2020). These factors, the extra time afforded mance of individual investors. Our study also analyzes the performance
to individuals globally by the COVID-19 lockdown that started in early of individual investors according to the intensity of their trading activity
2020 and an increasing use of social media have brought the perfor- and examines whether timing, as well as experience (proxied by the
mance of retail investors to the forefront.1 length of time an investor has been in the market), can explain the per-
On aggregate, for every investor overperforming the market, there formance of individual investors. The paper also allows us to test the
must be another investor underperforming it, and investors must earn the predictions of the rational expectations model proposed by Grossman and
market return before costs. However, we still know relatively little about Stiglitz (1980) and to compare them to those of a model in which in-
the performance of households in emerging stock markets. Our aim is to vestors suffer from overconfidence bias (Odean, 1999). For Daniel and
shed light on the performance of individual investors in Colombia, a Hirshleifer (2015, p. 1), “…Overconfidence means having mistaken
stock market characterized by an active investor community, relative valuations and believing in them too strongly.”
illiquidity (except for the largest companies), relatively high transaction The data that we use have the following positive features. The data
costs, corporate governance issues, and presumably grater information include all transactions executed in a specific stock market (the Colom-
asymmetries than those found in developed markets (Wyman, 2016). bian Stock Exchange), comprise a relatively long period of time (between

☆
We would like to thank Daniela Gracia for providing excellent research assistance.
* Corresponding author.
E-mail address: [email protected] (F. Pulga).
1
We use the terms “retail investors” and “individual investors” interchangeably throughout the text.

https://doi.org/10.1016/j.heliyon.2021.e08583
Received 18 June 2020; Received in revised form 7 March 2021; Accepted 7 December 2021
2405-8440/© 2021 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
U. Garay, F. Pulga Heliyon 7 (2021) e08583

January 2, 2006 and January 29, 2016), and allow us to identify all More specifically, whereas households that trade frequently earn a net
transactions made by each individual investor in the database. Pedraza mean annual return of 11.4%, investors that trade infrequently earn
et al. (2019) have already used this database to analyze the trading 18.5%. These results are consistent with models in which trading origi-
behavior and performance of foreign investors with different manage- nates from investor overconfidence and are inconsistent with models
ment styles (we comment more on this paper below). However, whereas according to which trading arises from rational expectations. Barber and
their paper focuses on the trading behavior and performance of foreign Odean (2000) also found that after accounting for transaction costs, in-
institutional investors relative to domestic institutional investors, our dividual investors significantly underperform on relevant benchmarks.
paper concentrates on the trading behavior and performance of indi- The authors also conclude that households trade common stocks
vidual investors on an aggregate level in relation to the intensity of their frequently, trading costs are high (approximately 3% in commissions and
trading and on the impact of trading characteristics on their performance. 1% in bid-ask spread), and households tilt their investments toward small
We find that households had negative abnormal returns on a gross high-beta stocks.
excess return basis that ranged from 4% to 4.4% per year (alphas vary Barber and Odean (2013) provide a synopsis of research on individual
slightly depending on whether they were estimated using the CAPM, investors and their stock trading behavior and document that the
Fama-French model or Carhart model). When transaction costs are behavior of such investors detrimentally affects their financial wellbeing
considered, the underperformance of retail investors becomes even more because they underperform on standard benchmarks, suffer from the
dismal. The average individual investor biases its portfolio toward small, “disposition effect” (they tend to sell winning investments while keeping
low-beta stocks and turns over approximately 8.8% of its portfolio their losing investments), are heavily influenced by past return perfor-
monthly. Additionally, the most active traders perform worse than less mance and limited attention in their purchase decisions, avoid past be-
active traders even on a gross excess return basis. When we divide the haviors that have generated pain while repeating past behaviors that
sample period into two subperiods, we find that the alpha was approxi- have coincided with pleasure, and tend to hold undiversified stock
mately 2% more negative in the first subperiod (01-2006/10-2012) than portfolios.2 The disposition effect is often cited as one of the main de-
in the second subperiod (11-2012/01-2016). We also find that individual terminants of the performance recorded by individual investors.
investors had bad timing over the whole sample period, explaining their Previously, Grossman and Stiglitz (1980) developed a rational ex-
inferior performance, but this bad timing disappeared after the bank- pectations model in which a group of investors choose to invest passively
ruptcy of Interbolsa (which occurred in October of 2012), the largest and others choose to acquire costly information. While in equilibrium all
stock brokerage firm in Colombia, suggesting that the worst underper- investors have the same expected utility, active and informed investors
formers might have disappeared after this event. Finally, we find that earn higher precost returns. These higher precost returns are needed to
investors present in the market for a longer period of time (a variable that compensate investors for the expenses associated with information
can be regarded as a proxy for experience) and trading more actively gathering and processing and are no longer abnormal when they are
outperform the other investors (on both a gross and net basis). To the best accurately accounted for. In a large liquid market, information costs
of our knowledge, this paper is the first to offer evidence of the positive probably explain only small abnormal returns.
effect that the combination of trading intensity and experience may have According to Lee et al. (1991), investor sentiment is normally
on investor returns. attributed to individual retail investors. Individual investors tend to place
Section 1 presents a literature review, where rational expectations small trades, and their purchases and sales must be correlated if they are
and behavioral finance models on the expected performance of individ- to substantially influence prices (Barber et al., 2009). The authors use
ual investors are discussed, and their associated empirical evidence is transaction data and identify buyer- or seller-initiated trades to study the
presented. Section 2 examines the data and presents the methodology trading of individual investors. The authors find that individual investors
followed in the study; Section 3 presents the results of the paper, herd, that small trade order imbalances forecast future returns, that small
including a number of robustness checks and extensions; and Section 4 trade order imbalances are correlated with order imbalances based on
offers conclusions, potential extensions and implications of the paper. trades (from retail brokers), and that, over a weekly horizon, small trade
order imbalances reliably predict returns.
2. Literature review Barber et al. (2009) analyze the performance of individual investors
in Taiwan (the world's 12th largest stock market at the time of the study)
The study of the trading behavior and performance of individual in- using a unique and complete dataset including complete transaction data,
vestors has gained increasing interest over the past two decades. In the identity of each trader and underlying order data for the period of
research conducted up to the late 1990s, the study of investor perfor- 1995–1999. The authors find that trading in financial markets by indi-
mance concentrated mostly on the performance of institutional investors vidual investors causes economically large losses and that nearly all of
and, more specifically, on the performance of equity mutual funds. At the the losses can be traced to their aggressive orders. The authors also
time, data on mutual fund returns were readily available, and economists construct portfolios that mimic the buying and selling of each investor
tested whether investors were unable to earn superior risk-adjusted and find that while individuals lose, each group of institutional investors
returns after reasonably accounting for transaction and opportunity analyzed (corporations, foreigners, dealers, and mutual funds) wins.
costs (Barber and Odean, 2013). On the institutional side of the market, Furthermore, most of the losses by individuals and gains by institutions
most studies of mutual funds conclude that the performance of the occur within a few weeks of trading.
average fund lags behind that of the aggregate market and that only little In another important country-based study, Linnainmaa (2010) uses
evidence exists in support the proposition that the few mutual funds that data from the Finnish Stock Exchange for 1998 to 2001 to identify
do outperform exhibit persistence. This issue is, however, far from having whether an investor has placed a market or a limit order, a feature that
been settled. was made possible by the characteristics of the Finish dataset. Linnain-
Barber and Odean (2000) conducted a seminal study in which they maa (2010) finds that individual investors underperform related to
analyzed the position statements and trading activity of 78,000 house- informed traders because the latter select their limit orders. More spe-
holds under a large discount brokerage firm between 1991 and 1996, cifically, the returns on individual investor trades that originate from
finding evidence suggesting that overconfidence leads to excessive
trading. While Barber and Odean (2000) found that there is very little
difference between the gross performance of households that trade 2
The following authors also provide literature reviews dedicated to behav-
frequently and those that trade infrequently and found a significant dif- ioral economics and finance: Rabin (1998), Shiller (1999), Hirshleifer (2001),
ference in returns when transaction costs (e.g., commissions, market Daniel et al. (2002), Barberis and Thaler (2003), Campbell (2006), Benartzi and
impact, bid-ask spreads, and transaction taxes) are taken into account. Thaler (2007), and Subrahmanyam (2008).

2
U. Garay, F. Pulga Heliyon 7 (2021) e08583

Table 1. Descriptive statistics. The sample of individual investors at the Colombian Stock Exchange from 2006 to 2016 records 5,380,810 trades of 42,211 individuals.
Panel A exhibits descriptive statistics calculated per transactions: Trades is the number of transactions, either buys or sells, during the period performed by each investor.
Volume is the monetary amount traded by investor, expressed in Million COP (Colombian Pesos). Trade size is expressed in Million COP. Commissions are calculated as
the total commission expense divided by the total volume traded by investor, and is expressed in percentage. Monthly turnover is calculated as the maximum of monthly
buys or sells divided by the value of shares held during the month. Panel B exhibits descriptive statistics of monthly raw returns of individual investors expressed in
percentages (i.e. not risk-adjusted): Raw is the return of the portfolio for every investor, calculated as the ratio of the market value of her portfolio at the end and the
beginning of each month minus one, including dividends. Net is calculated as the ratio of the market value of her portfolio at the end and the beginning of each month
minus one, including dividends, net of commissions.
Mean 25th Percentile Median 75th percentile Sd Observations
Panel A. Trades descriptive statistics
Trades 127.47 27 44 89 648.68 5,380,810
Volume 4,547 341 758 2,036 41,205 5,380,810
Trade size 35.67 12.63 17.23 22.88 63.52 5,380,810
Commissions 2.36 1.76 2.07 2.70 1.04 5,380,810
Monthly turnover 8.82 6.53 8.30 10.23 4.11 5,380,810
Panel B. Individuals raw returns descriptive statistics
Raw -0.0404 -0.1185 -0.0309 0.0541 0.2167 42,211
Net -0.0632 -0.1379 -0.0487 0.0330 0.2312 42,211

limit orders lose 0.51% on the day following a trade and 3.3% over a outperform individuals who are more diversified. Ivkovic and Weisben-
63-day period. However, whereas individual investors in Finland lose ner (2005) show that individuals outperform the market when they buy
money on executed limit orders, they make money on executed market the stocks of companies that operate close to their homes (compared to
orders. When gains and losses are combined, the profits are not signifi- the stocks of far-away companies). Finally, and as noted above, Kaniel
cantly different from zero. However, the evidence from Taiwan, which et al. (2008) find that stocks heavily purchased by individuals in one
has an electronic limit order market, differs from the evidence from month generate positive excess returns in the subsequent month. A
Finland. criticism of the previous findings is that given the low diversification of
Most existing empirical research suggests that individual investors many of the accounts of these studies, one would expect substantial
behave differently from investors in rational expectations models. For cross-sectional variation in performance by chance (even if there are no
example, many apparently uninformed investors trade speculatively, differences in skill; see Barber and Odean, 2013).
actively, and to their detriment, and most retail investors hold undi- Sicherman et al. (2015) find that daily investor online account logins
versified portfolios. Furthermore, when viewed as a group, individual fall by 9.5% after the market declines and that investors also pay less
investors make systematic (not random) buying and selling decisions. A attention to the market when volatility (measured using the VIX volatility
salient finding in the literature is that most research concludes that the index) is high. The level of attention and the correlation between
average long-run performance of individual investors is poor even before attention and returns are strongly related to financial position (wealth
costs. However, and contrary to the long-run evidence, there is evidence and holdings) and to investor demographics (age and gender). Andries
that indicates that the returns obtained by individual investors over very and Haddad (2019) developed a life-cycle model in which under-
short horizons (up to a week) seem to be fairly strong. For example, diversification can be generated by preference-based utility costs of in-
Kaniel et al. (2008) find that the stocks bought by individuals in the 10 formation because investors choose to have only a few stocks in their
days preceding an earnings announcement outperform, on average, those portfolios to reduce the likelihood of receiving disappointing informa-
sold in the two days around the earnings announcement by approxi- tion. In a recent paper, Quispe-Torreblanca et al. (2020) use data on
mately 1.5%. brokerage account logins by individual investors and find that in-
There exists great variation in performance across individual in- dividuals devote disproportionate attention to already-known positive
vestors, and this cross-sectional variation in performance can be traced to information about the performance of individual stocks that they have in
cognitive abilities (for example, Korniotis and Kumar, 2009a, conclude their portfolios and increase trading after recent gains. Conversely, these
that smarter investors outperform others by approximately 3.6% per individuals display an aversion to paying attention to unfavorable in-
year), IQ (Grinblatt et al., 2012, determine that in Finland, the spread in formation, which reduces trading after recent losses. These findings are
returns earned by low versus high IQ investors is a significant 2.2% per consistent with individual investors exhibiting “information aversion”
year), experience (Campbell et al., 2014, document that both investment (Andries and Haddad, 2019). Previously, Olafsson and Pagel (2017)
experience and feedback from investment returns affect investor found that attention to financial accounts by individuals is increasing for
behavior, performance, and favored stock styles), age (Korniotis and cash holdings, savings, and liquidity and decreasing for spending and
Kumar, 2009b, find that investment performance declines with age), overdrafts. Finally, Song (2020) finds that even though attention to ac-
optimism (Kaplanski et al., 2015, find that individuals with more positive counting information by individual investors is high, their acquisition of
sentiment also have higher return expectations and a higher intention to accounting information does not necessarily contribute to information-
buy stocks), and gender (Barber and Odean, 2001, find that men perform ally efficient capital markets.
worse than women and relate these results to the fact that men trade We still know little about the performance of individual investors in
more often than women because they are more prone to overconfidence). emerging markets (with the exception of that in Taiwan, which is
The cross-sectional variation in performance has also been linked to in- nonetheless a relatively large market among the emerging markets and
vestment skill, investment style, and location. one where day trading is very prominent). However, Campbell et al.
A few notable studies find evidence that individual investors over- (2014) use data on Indian stock portfolios and find that both years of
perform in the market. For example, Ivkovic et al. (2008) find evidence investment experience and feedback from investment returns have sig-
that individual investors with relatively concentrated portfolios nificant effects on investor behavior, performance and favored stock

3
U. Garay, F. Pulga Heliyon 7 (2021) e08583

styles. In a subsequent and more recent paper, Campbell et al. (2019) find concern with these securities is that there was actually no trading activity
return heterogeneity to be the most important contributor explaining the on them. Such stocks are traded mostly by “buy and hold” investors.
increasing inequality of wealth held in risky assets by Indian individual The application of the previous filters led to the exclusion of 70% of
investors. the stocks and 92% of the accounts present in the database. The exclusion
The following are further questions that we attempt to answer in this of stocks with low trading activity and “buy and hold” investors allows us
paper. Are retail investors able to time the market? Do trading experience to keep 77% of the trades. To analyze the results by trading activity, we
and trading intensity affect the returns of retail investors? How does the divide the data by quantiles of trades.6 Data show that the top quantile of
performance of institutional investors with regard to trading intensity trades encompasses 80% of the transactions; therefore, the results of the
compare to that of retail investors? regressions of aggregate investors are mainly explained by this group.
This result implies that adding “buy and hold” investors to the dataset
3. Data and methodology should not divert our main results. We are left with 42,211 individual
investors and 5,380,810 transactions. Stock prices were adjusted for
The dataset that we use was provided by the Colombian Stock Ex- splits and other corporate events that affected their nominal value.
change and includes all stock transactions executed between January 2, We also calculate the variable “spread,” measured as in Barber and
2006 and January 29, 2016.3 For each transaction, the dataset includes Odean (2000). This is a relative measure of the buy or sell price against
the date and time of the transaction, the transaction price, the number of the daily closing price. We found that the mean value of this variable
shares traded, the name of the company, whether the order was a buy or reached only -0.09%, suggesting that the stocks in our final database are
sell trade, a stock identifier, and a broker ID. As noted by Pedraza et al. relatively liquid stocks.
(2019), who used these data to compare the performance of domestic We do not know the exact portfolio that each investor has in the
versus foreign institutional investors in Colombia, a key aspect of the dataset. Therefore, and similar to Pedraza et al. (2019), we created
dataset, and one that is very relevant to us, is that every purchase and sell investor portfolios assuming a zero initial holding condition for each
record includes a distinctive investor ID number that allows for the investor for the first date that he or she appears in the dataset. We then
identification of each transaction executed on behalf of each investor added daily stock holdings to each investor over time. For each investor,
throughout the sample period. It is important to highlight here that most we identified negative holdings at the end of the whole period of the
of the existing empirical literature proxies the transactions performed by dataset and added this value to the zero initial holdings to account for the
individual investors as those that correspond to small trades. However, short-sell ban. Errors in our measure from differences in initial conditions
we have the advantage of being able to identify whether a transaction should decline over time if portfolio turnover is large enough and
corresponds to an individual or to an institutional investor because we considering that the sample period spans 10 years.
have access to a distinct investor ID. As the main limitations of the Each individual investor's portfolio return is calculated monthly as (Pt
database, we do not have information on the demographic characteristics – Pt-1)/Pt-1 where Pt is the value of the portfolio at the end of the month
of retail investors and nor a record of the order book for stocks. and Pt-1 is the value of the portfolio at the beginning of the month. Pt is
The Colombian stock market had a market capitalization of USD 11.1 found by multiplying the number of stocks of each company in the in-
billion at the beginning of the study period (2006). The highest market vestor's portfolio by its closing price at t and summing them. The value of
capitalization level of the sample period was reached in 2010 (USD 15.5 the portfolio includes cash dividend payments. We obtained stock
billion), and it later declined to USD 8.6 billion in December of 2005. returns, share prices, trading volumes, and bid-ask spreads from
The initial dataset includes all buy and sell stock trades and excludes Bloomberg, Datastream and the Colombian Stock Exchange.
repurchase agreements and shares tendered for short sales.4,5 We also We measure investor turnover as the maximum between the sum of
exclude international stocks, domestic stocks for which there were less monthly buys and sells by an investor divided by the value of the
than one thousand transactions during the sample period, and investors portfolio.
that transacted less than 20 times during the whole sample period. On We calculate three measures of risk-adjusted performance. First, we
average, such traders executed only two trades during the sample period, calculate the alpha starting with the CAPM (Jensen's alpha). We estimate
and thus, we categorize them as “buy and hold” investors with no the following monthly time-series regression in which we regress the
meaningful trading activity. We also discard transactions of below monthly excess return earned by each individual investor (r - rf) on the
154,500 Colombian Pesos (equivalent to between approximately USD 50 market excess return (Eq. (1)):
and USD 75 depending on the exchange rate of the respective date). We

also exclude investors who did not perform trades for periods of at least r
rf ¼ α þ β1 rm
rf þ ε (1)
24 months.
Stocks that did not trade for three or more months were also excluded. where rf is the risk-free rate and (rm - rf) is the market excess return.
We excluded “special issues” of non-dividend common stocks, which Second, we employ an intercept test using the three-factor model
represent 14% of the total securities included in our database. Our main developed by Fama and French (1993), also known as the three-factor
alpha. Thus, to evaluate the performance of individuals in aggregate,
we estimate the following monthly time-series regression (Eq. (2)):


3
r
rf ¼ α þ β1 rm
rf þ β2 ðSMBÞ þ β3 ðHMLÞ þ ε (2)
We would like to thank Adriana Cardenas and other members of the
Colombian Stock Exchange Research Committee for kindly providing the data.
4 where rf is the risk-free rate, (rm - rf) is the market excess return, SMB is
Short-sales were allowed in the Colombian Stock Exchange during the
calculated as the return on a value-weighted portfolio of small stocks
period of analysis. However, investors had to close short positions by the end of
each trading day, and therefore we were not able to use short sale information in
minus the return on a value-weighted portfolio of large stocks, and HML
our study, as this information is not observable in the database. is calculated as the return on a value-weighted portfolio of high book-to-
5
When the price of a stock changes by more than 10% relative to its reference market stocks minus the return on a value-weighted portfolio of low
price, the Colombian Stock Exchange suspends trading in that stock for 30 min.
Additionally, all transactions made in the exchange are suspended until the next
6
trading day if the COLCAP index (the local benchmark) declines by more than Almost all of these “buy and hold” investors were actually individuals who
10% during a trading session. The COLCAP is a value-weighted index. As of the participated in the IPO of Ecopetrol in 2007 (in which approximately half a
first quarter of 2018, it included 25 companies, the largest of which was Eco- million individuals participated, as this IPO was intended to be available to the
petrol (12.70% of the total market capitalization of the index), followed by general public) and did not trade again during the rest of the sample period (or,
Bancolombia (12.13%). at most, sold the stocks of Ecopetrol that they had initially bought in the IPO).

4
U. Garay, F. Pulga Heliyon 7 (2021) e08583

book-to-market stocks. Barber and Odean (2000) argue that one should had a standard deviation of 0.23%. Both gross and net returns become
place particular attention on the Fama–French intercept tests, as indi- monotonically more negative from the first to fifth quintiles of trading
vidual investors tend to bias their portfolios toward small stocks and the intensity (these results are not reported in the table). It is important to
three-factor model offers a reasonable adjustment for this small stock note that whereas the gross and net raw returns of individual investors
bias. reported in Barber and Odean (2000) were positive for all quintiles, for
The third intercept test is performed using the Carhart four-factor Colombia, all of the raw returns of individual investors (both gross and
model (Eq. (3)). This intercept is known as the four-factor alpha. The net and for all quintiles) are negative.
Carhart four-factor model adds a momentum factor to the three-factor The results of the panel regressions on the three measures of risk-
model of Fama and French. Momentum (WML) is the tendency for adjusted performance (the CAPM, Fama and French model or 3-factor
stock prices to continue to rise when a stock price is increasing and to model and the Carhart or 4-factor model) are presented in Table 2.
continue to decrease when stock prices are declining. Momentum is Whereas Panel A of the table presents the results for the gross return
calculated by constructing a zero-cost portfolio that is long for the pre- performance of aggregate individual investors, Panel B shows the net
vious 12-month return winner stocks and short for the previous 12- return results. The results of the three models clearly indicate that
month loser stocks, reflecting the monthly premium on winners minus households underperform even in terms of gross returns (recall that
losers. Barber and Odean, 2000, found very little difference between the gross


performance of individual investors that trade frequently and those that
r
rf ¼ α þ β1 rm
rf þ β2 ðSMBÞ þ β3 ðHMLÞ þ β4 ðWMLÞ þ ε (3) trade infrequently). The alphas range from -0.34% per month to -0.37%
per month on a gross return basis, and underperformance is even worse
The portfolios for the factors (i.e., market, SMB, HML and WML) for
when transaction costs are included. The six alphas are negative and
Colombia were calculated by Pedraza et al. (2019), who kindly provided
statistically significant at 1%. Underperformance by individual investors
these data to us. The risk-free rate that we employed is the one-month
represents between 4% and 4.4% on an annualized basis. These results
Colombian T-bill rate.
strongly suggest that individual investors in Colombia would have earned
higher returns if they had invested in the aggregate stock market.
4. Results
We now turn to our analysis of the coefficient estimates on the mar-
ket, size, book-to-market, and momentum factors. On aggregate, and as
During the sample period of 2006–2016, aggregate stock market
expected, individual investors tend to bias their portfolios toward small
capitalization in Colombia ranged from a minimum of 34% of GDP in
stocks, as suggested by the positive and small coefficients on SMB for
2005 to a maximum of 73% in 2012 (ending at 35% in 2015), and the
both the three- and four-factor models (the results are significant at the
number of listed firms started at 68 in 2005 and ended at 65 firms in
1% level). Furthermore, the market beta for stocks held by households is
2015. According to evidence presented by Pedraza et al. (2019), between
less than one, which is intriguing and suggests that individual investors
2006 and 2010, domestic individual investors accounted for 46% of all
hold a portfolio of stocks that differs in some respects from the market
stock transactions (in total value) made in the Colombian Stock Exchange
portfolio. Individual investors in Colombia have slightly negative expo-
and for 27% between 2011 and 2016.7 The decline between the two
sure to the HML factor and show a slight tilt toward momentum (WML),
subperiods could be attributed to the effects of the Global Financial Crisis
with both coefficients significant at the 1% level in all specifications. We
of 2008-09 on subsequent years, which might have affected individual
can compare these results to those presented by Pedraza et al. (2019) for
investors more harshly than institutional investors, and the negative ef-
institutional investors in Colombia. The exposure of these investors (both
fects of the bankruptcy of Interbolsa, the largest stock brokerage in
domestic and foreign) to factors of the CAPM and Carhart model (the two
Colombia, in late 2012. This brokerage firm had close to 20,000 clients,
models that they use) is, as opposed to our case, higher, although still
and its demise was a shock that affected the confidence of investors in the
lower than one (in terms of exposure to the market factor). Institutional
system.
investors exhibit limited and negative exposure to the SMB factor, which
Table 1 shows the descriptive statistics of our database. Panel A shows
is consistent with institutional investors tilting their portfolios toward
that a total of 5,380,810 trades were executed on behalf of 42,211 in-
larger companies.
dividuals. The mean number of trades reached 127.47 and the median
reached 44. The number of trades is strongly skewed to the right, similar
4.1. Performance and trading
to volume and trade size (both of which are measured in Colombian
pesos or COP). This skewed-to-the-right behavior has also been docu-
In the rational expectations model proposed by Grossman and Stiglitz
mented by Barber and Odean (2000) for the U.S. and by Barber et al.
(1980), investors will trade until the marginal benefit of transacting
(2009) for Taiwan, among other papers, wherein a small %age of all
equates to or exceeds the marginal costs of the trade, including infor-
households are responsible for a large fraction of all trades and volume
mation costs. According to this model, active and passive investors have
executed. Mean commissions reached 2.36% (median commissions
the same expected utility. On the other hand, in models in which in-
reached 2.07%). The mean commission declines as the volume increases,
vestors suffer from overconfidence, investors will trade excessively, and
as the commissions charged by brokerage houses decrease when the total
trading, at the margin, will decrease their expected utility (see, for
volume traded by the investor increases. The monthly mean turnover
example, the model proposed by Odean, 1999). Overconfidence bias is
reached 8.82, a number that is slightly higher than the figure reported by
suffered by investors that are absolutely confident of their decisions,
Barber and Odean (2000) of approximately 6.0.
leading to overestimations or exaggerations (for a review of over-
Panel B of Table 1 shows the raw returns for the sample of 42,211
confidence bias, see Daniel and Hirshleifer, 2015).
individual traders for between 2006 and 2016. It is worth noting that the
As explained by Barber and Odean (2000), in the model developed by
mean gross monthly returns were negative (
0.04%) with a standard
Grossman and Stiglitz, active traders must earn higher expected gross
deviation of 0.22%. Mean net monthly returns were lower (
0.06%) and
returns to compensate for their higher trading costs. Furthermore, this
model predicts that the gross risk-adjusted return performance of the
7 most active investors will be higher than that of investors with low
Domestic institutions (corporations, pension funds, mutual funds, brokerage
firms, and others) were responsible for 50% of all transactions (in total value) turnover, but both types of investors will have similar net risk-adjusted
between 2006 and 2010 and for 27% between 2011 and 2016. Finally, foreign returns. On the other hand, the overconfidence model predicts that the
investors accounted for 4% and 17% of all transactions made from 2006-2010 net return performance of investors with high turnover will be lower than
and 2011–2016, respectively. The participation of individual investors among that of investors with low turnover while making no prediction about the
foreign investors was negligible. differences in gross returns.

5
U. Garay, F. Pulga Heliyon 7 (2021) e08583

Table 2. Individual investors’ performance. This table reports estimates of the CAPM, the Fama and French 3-factor model and the Carhart 4-factor model for individual
investors at the Colombian Stock Exchange from 2006 to 2016. The dependent variables are the gross and net returns in excess of the one-month Colombian T-bill rate.
Market is the return in excess of the Colombian market index (COLCAP) relative to the one-month T-bill rate. SMB is the return on a portfolio of small cap stocks minus
big cap stocks. HML is the return on a portfolio long in high book-to-market ratio and short in low book-to-market ratio. WML is the return on a portfolio long on winner
stocks during the previous 12 months and short on loser shares during the same period. Note: t-statistics in parentheses. */**/*** indicate that the coefficient estimates
are significantly different from zero at the 10%, 5%, 1%, respectively.
Gross risk-adjusted return Net risk-adjusted return

CAPM 3-Factor 4-Factor CAPM 3-Factor 4-Factor

Market 0.356*** 0.385*** 0.392*** 0.356*** 0.384*** 0.391***
(17.46) (17.33) (17.42) (17.29) (17.12) (17.21)
SMB 0.120*** 0.132*** 0.118*** 0.130***
(2.93) (3.20) (2.86) (3.12)
HML -0.0426 -0.0434 -0.0402 -0.0410
(-1.10) (-1.13) (-1.03) (-1.05)
WML 0.0579 0.0581
(1.60) (1.59)
Constant -0.00371*** -0.00343*** -0.00355*** -0.00392*** -0.00364*** -0.00376***
(-3.11) (-2.94) (-3.06) (-3.25) (-3.09) (-3.21)
Observations 119 119 119 119 119 119
R-squared 0.7227 0.7425 0.7481 0.7187 0.7379 0.7436

To test the predictions of these two competing models with regard to quintiles are determined by the volume traded and then by the alphas
trading and performance, we follow a procedure similar to that employed that correspond to the quintiles classified by trading commissions. In the
by Barber and Odean (2000) by dividing the sample of investors into case of volume, and similar to the case of the number of trades used as the
quintiles based on total trades. We then proceed to estimate the param- base case before, the alpha is negative for each quintile, and it declines as
eters of the CAPM, Fama and French's three-factor model, and Carhart's one moves from the lowest to the highest quintiles by volume on both a
four-factor model for each quintile by trade. The results are shown in gross and net return basis and regardless of the model used. A similar
Table 3 (once again, whereas Panel A of the table presents the results for result is found when we construct the quintiles based on trading com-
the gross return performance of individual investors in aggregate, Panel B missions spent. These results reinforce the message that higher levels of
shows the net return results). First and importantly, the gross return trading activity are associated with inferior performance, even on a gross
performance, which is negative for each quintile, deteriorates mono- return basis.
tonically as one moves from the lowest to the highest quintile by trading, Next, we divide the sample period into two subperiods determined by
regardless of the model used to measure performance. Whereas low the bankruptcy of Interbolsa, which occurred in October 2012. Results
trading intensity quintiles underperform by between 0.29% and 0.32% are shown in Table 5. We find that both alphas were negative, that the
per month, high trading intensity quintiles do so by between 0.40% and alpha was approximately 2% more negative in the first subperiod (01-
0.43%. The difference in gross return performance between investors in 2006/10-2012) than in the second subperiod (11-2012/01-2016) and
the highest quintile by trade and the lowest ranges from 1.3% to 1.5% (on that alphas were significant in both subperiods. Additionally, the market
an annualized basis) depending on the model used. These results are betas declined substantially between the first and second subperiods. A
clearly at odds with the prediction of the model of Grossman and Stiglitz Chow structural stability test confirms that both the intercepts and betas
(1980) and can be accommodated to the model proposed by Odean are different between the two subperiods (results of the test are not
(1999). In short, households that traded the most were not only unable to shown, but they are available upon request).
earn higher gross returns but also underperformed related to investors In Table 6, we test for the timing ability of individual investors using
who traded less on a gross return basis. Furthermore, the coefficient es- the Treynor and Mazuy (1966) and Henriksson and Merton (1981)
timates reveal that investors with higher trading activity tilt their port- models for timing for individual investors both on gross and net
folios more heavily toward low-beta and momentum stocks and less risk-adjusted returns and for the whole sample period (2006–2016). For
heavily toward value stocks than households that engage in less trading. both gross and net returns, we find negative and significant coefficients
for variable Marketsq (return of the market in excess of the Colombian
T-bill rate squared) and negative and significant coefficients for variable
4.2. Robustness checks and extensions
Marquet2 (maximum between zero and the negative value of the mar-
ket). These results suggest that individual investors had bad timing for
As a first robustness check of our main results, we use volume traded
the whole sample period, resulting in the underperformance of investors.
(expressed in Colombian pesos) as an alternative measure of trading
These results explain the nonsignificant coefficients found for the alphas
activity (instead of the number of transactions previously used), and we
of the four regressions presented in Table 6.
also divide the sample by quintile based on trading commissions spent by
We also ran the same regressions but in this case for the period prior
investors. The results are presented in Table 4 (for ease of presentation,
to the bankruptcy of Interbolsa (until October of 2012).9 We found that
we show only the results for the alpha for each model and quintile).8
the timing factor still explains the underperformance of investors during
Panel A presents the results of the CAPM, Panel B presents the results of
the first subperiod (01-2006/10-2012). However, when we run the same
the Fama and French 3-factor model, and Panel C presents the results of
regressions for the period following the bankruptcy of Interbolsa (after
the Carhart 4-factor model. For each panel, we first again present the
October of 2012), we find that the sign of the timing factor changes from
alphas shown in Table 3 (trades), followed by the alphas obtained when
significantly negative to insignificantly positive in all specifications. This
finding is consistent with the possibility that, on average, only the best
8
Overall, coefficients on the factors for each of the three models (the CAPM,
Fama and French model, and Carhart model) are similar to those of the main
9
model (Table 3). The results are available upon request. The results are available upon request.

6
U. Garay, F. Pulga Heliyon 7 (2021) e08583

Table 3. Individual investors’ performance by trades. This table reports estimates of the CAPM, the Fama and French 3-factor model and the Carhart 4-factor model for
individual investors at the Colombian Stock Exchange from 2006 to 2016 sorted by quantiles of trades. Panel A exhibits the coefficient estimates on gross excess returns
and Panel B on net excess returns. Market is the return in excess of the Colombian market index (COLCAP) relative to the one-month T-bill rate. SMB is the return on a
portfolio of small cap stocks minus big cap stocks. HML is the return on a portfolio long in high book-to-market ratio stocks and short in low book-to-market ratio stocks.
WML is the return on a portfolio long on winner stocks during the previous 12 months and short on loser shares during the same period. Note: t-statistics in parentheses.
*/**/*** indicate that the coefficient estimates are significantly different from zero at the 10%, 5%, 1%, respectively.
Trades CAPM 3-Factor 4-Factor

Alpha Market Alpha Market SMB HML Alpha Market SMB HML WML
Panel A. Gross risk-adjusted returns
Group 1 - Low -0.00320** 0.402*** -0.00289** 0.431*** 0.127*** -0.0559 -0.00300** 0.437*** 0.138*** -0.0566 0.0530
(-2.46) (18.14) (-2.28) (17.81) (2.85) (-1.33) (-2.37) (17.78) (3.06) (-1.35) (1.34)
Group 2 -0.00342*** 0.385*** -0.00313** 0.413*** 0.121*** -0.0527 -0.00324*** 0.419*** 0.132*** -0.0534 0.0513
(-2.75) (18.12) (-2.58) (17.80) (2.84) (-1.30) (-2.67) (17.77) (3.05) (-1.32) (1.35)
Group 3 -0.00368*** 0.358*** -0.00338*** 0.388*** 0.124*** -0.0434 -0.00350*** 0.395*** 0.135*** -0.0441 0.0556
(-3.02) (17.21) (-2.85) (17.13) (2.97) (-1.10) (-2.96) (17.18) (3.22) (-1.12) (1.50)
Group 4 -0.00388*** 0.341*** -0.00360*** 0.369*** 0.116*** -0.0406 -0.00372*** 0.376*** 0.128*** -0.0414 0.0570
(-3.35) (17.25) (-3.19) (17.13) (2.92) (-1.08) (-3.31) (17.23) (3.19) (-1.11) (1.62)
Group 5 - High -0.00429*** 0.299*** -0.00402*** 0.329*** 0.116*** -0.0254 -0.00417*** 0.338*** 0.131*** -0.0264 0.0712**
(-3.82) (15.61) (-3.69) (15.83) (3.03) (-0.70) (-3.88) (16.17) (3.41) (-0.74) (2.12)
Panel B. Net risk-adjusted returns
Group 1 - Low -0.00347*** 0.401*** -0.00317** 0.430*** 0.124*** -0.0533 -0.00328** 0.436*** 0.135*** -0.0540 0.0529
(-2.65) (17.95) (-2.47) (17.58) (2.77) (-1.25) (-2.56) (17.55) (2.97) (-1.27) (1.32)
Group 2 -0.00366*** 0.384*** -0.00337*** 0.412*** 0.119*** -0.0500 -0.00349*** 0.418*** 0.130*** -0.0507 0.0518
(-2.92) (17.94) (-2.74) (17.58) (2.76) (-1.22) (-2.84) (17.56) (2.97) (-1.24) (1.35)
Group 3 -0.00388*** 0.358*** -0.00359*** 0.387*** 0.122*** -0.0411 -0.00371*** 0.394*** 0.134*** -0.0418 0.0556
(-3.16) (17.03) (-2.99) (16.92) (2.90) (-1.03) (-3.10) (16.96) (3.13) (-1.05) (1.49)
Group 4 -0.00406*** 0.341*** -0.00379*** 0.369*** 0.114*** -0.0381 -0.00391*** 0.376*** 0.126*** -0.0388 0.0571
(-3.47) (17.09) (-3.32) (16.93) (2.85) (-1.00) (-3.44) (17.03) (3.11) (-1.03) (1.61)
Group 5 - High -0.00443*** 0.299*** -0.00416*** 0.329*** 0.114*** -0.0231 -0.00432*** 0.338*** 0.129*** -0.0241 0.0719**
(-3.92) (15.49) (-3.79) (15.69) (2.97) (-0.63) (-3.98) (16.03) (3.35) (-0.67) (2.12)

Table 4. Abnormal returns. This table reports estimates of the abnormal returns of the CAPM, the Fama and French 3-factor model and the Carhart 4-factor model for
individual investors at the Colombian Stock Exchange from 2006 to 2016 sorted by quantiles of trades, volume and commissions (%). Panel A exhibits the estimates on
the CAPM model, Panel B on the Fama and French 3-Factor model, and Panel C on the Carhart 4-Factor model. Note: t-statistics in parentheses. */**/*** indicate that the
coefficient estimates are significantly different from zero at the 10%, 5%, 1%.
Gross risk-adjusted return Net risk-adjusted return

1 2 3 4 5 1 2 3 4 5
Panel A. CAPM
Trades -0.00320** -0.00342*** -0.00368*** -0.00388*** -0.00429*** -0.00347*** -0.00366*** -0.00388*** -0.00406*** -0.00443***
(-2.46) (-2.75) (-3.02) (-3.35) (-3.82) (-2.65) (-2.92) (-3.16) (-3.47) (-3.92)
Volume -0.00354*** -0.00352*** -0.00360*** -0.00370*** -0.00413*** -0.00388*** -0.00375*** -0.00379*** -0.00386*** -0.00425***
(-2.87) (-2.89) (-2.96) (-3.06) (-3.61) (-3.10) (-3.05) (-3.09) (-3.18) (-3.69)
Commissions -0.00358*** -0.00368*** -0.00377*** -0.00378*** -0.00374*** -0.00372*** -0.00384*** -0.00394*** -0.00400*** -0.00410***
(-2.80) (-3.10) (-3.27) (-3.25) (-3.09) (-2.89) (-3.20) (-3.39) (-3.41) (-3.33)
Panel B. 3-Factor Model
Trades -0.00289** -0.00313** -0.00338*** -0.00360*** -0.00402*** -0.00317** -0.00337*** -0.00359*** -0.00379*** -0.00416***
(-2.28) (-2.58) (-2.85) (-3.19) (-3.69) (-2.47) (-2.74) (-2.99) (-3.32) (-3.79)
Volume -0.00326*** -0.00324*** -0.00331*** -0.00340*** -0.00385*** -0.00361*** -0.00347*** -0.00350*** -0.00357*** -0.00397***
(-2.71) (-2.72) (-2.78) (-2.89) (-3.45) (-2.95) (-2.88) (-2.92) (-3.01) (-3.54)
Commissions -0.00326*** -0.00339*** -0.00349*** -0.00352*** -0.00347*** -0.00341*** -0.00355*** -0.00367*** -0.00374*** -0.00383***
(-2.62) (-2.92) (-3.10) (-3.10) (-2.95) (-2.71) (-3.03) (-3.23) (-3.26) (-3.20)
Panel C. 4-Factor Model
Trades -0.00300** -0.00324*** -0.00350*** -0.00372*** -0.00417*** -0.00328** -0.00349*** -0.00371*** -0.00391*** -0.00432***
(-2.37) (-2.67) (-2.96) (-3.31) (-3.88) (-2.56) (-2.84) (-3.10) (-3.44) (-3.98)
Volume -0.00339*** -0.00335*** -0.00342*** -0.00352*** -0.00400*** -0.00373*** -0.00359*** -0.00361*** -0.00369*** -0.00413***
(-2.82) (-2.82) (-2.88) (-3.00) (-3.64) (-3.06) (-2.98) (-3.01) (-3.12) (-3.73)
Comissions -0.00341*** -0.00352*** -0.00361*** -0.00363*** -0.00360*** -0.00355*** -0.00367*** -0.00379*** -0.00386*** -0.00396***
(-2.75) (-3.04) (-3.21) (-3.21) (-3.07) (-2.84) (-3.15) (-3.34) (-3.38) (-3.33)

7
U. Garay, F. Pulga Heliyon 7 (2021) e08583

Table 5. Individual investors’ performance II. This table reports estimates of the CAPM, the Fama and French 3-factor model and the Carhart 4-factor model for in-
dividual investors at the Colombian Stock Exchange. Data are split into two periods: from January 2006 to October 2012, and November 2012 to December 2016, by
considering the event of default by the largest stock broker on the Colombian stock market. The dependent variables are the gross and net returns in excess of the one-
month Colombian T-bill rate. Market is the return in excess of the Colombian market index (COLCAP) relative to the one-month T-bill rate. SMB is the return on a
portfolio of small cap stocks minus big cap stocks. HML is the return on a portfolio long in high book-to-market ratio and short in low book-to-market ratio. WML is the
return on a portfolio long on winner stocks during the previous 12 months and short on loser shares during the same period. Note: t-statistics in parentheses. */**/***
indicate that the coefficient estimates are significantly different from zero at the 10%, 5%, 1%, respectively.
Gross risk-adjusted return Net risk-adjusted return

CAPM 3-Factor 4-Factor CAPM 3-Factor 4-Factor

Panel A. 2006–2012
Market 0.430*** 0.449*** 0.448*** 0.430*** 0.448*** 0.448***
(20.73) (20.00) (19.82) (20.48) (19.70) (19.52)
SMB 0.100** (2.13) 0.0998** (2.11) 0.0973** (2.04) 0.0971** (2.02)
HML -0.0447 -0.0447 -0.0420 -0.0420
(-1.15) (-1.14) (-1.07) (-1.06)
WML -0.00337 -0.00269
(-0.08) (-0.07)
Constant -0.00559*** -0.00535*** -0.00534*** -0.00589*** -0.00565*** -0.00564***
(-4.27) (-4.13) (-4.08) (-4.45) (-4.30) (-4.25)
Observations 81 81 81 81 81 81
R-squared 0.8447 0.8534 0.8534 0.8415 0.8496 0.8496
Panel B. 2012–2016
Market 0.0773*** 0.0805*** 0.0860*** 0.0773*** 0.0805*** 0.0860***
(17.86) (15.76) (13.28) (17.85) (15.78) (13.30)
SMB 0.000488 0.00617 0.000544 0.00624
(0.07) (0.78) (0.08) (0.79)
HML 0.0182* (1.80) 0.0190* (1.90) 0.0184* (1.82) 0.0191* (1.91)
WML 0.0100 0.0100
(1.37) (1.37)
Constant -0.00386*** -0.00391*** -0.00388*** -0.00387*** -0.00393*** -0.00389***
(-18.72) (-19.03) (-18.93) (-18.78) (-19.12) (-19.01)
Observations 38 38 38 38 38 38
R-squared 0.8986 0.9102 0.9150 0.8984 0.9103 0.9151

Table 6. Timing ability of individual investors. This table reports estimates of the Treynor-Mazuy, and Merton-Henriksson models of timing for individual investors at
the Colombian Stock Exchange from 2006 to 2016. The dependent variables are the gross and net returns in excess of the one-month Colombian T-bill rate. Market is the
Colombian market index (COLCAP) return in excess of the one-month T-bill rate. Marketsq is the return of the market in excess of the Colombian T-bill rate squared.
Market 2 is the maximum between zero and negative values of Market. Note: t-statistics in parentheses. */**/*** indicate that the coefficient estimates are significantly
different from zero at the 10%, 5%, 1%, respectively.
Gross risk-adjusted return Net risk-adjusted return

Treynor Mazuy Merton Henriksson Treynor Mazuy Merton Henriksson

Market 0.329*** 0.277*** 0.328*** 0.276***
(15.74) (6.61) (15.58) (6.52)
Marketsq -0.612*** -0.621***
(-3.56) (-3.58)
Market 2 -0.133** -0.135**
(-2.16) (-2.16)
Constant -0.00174 -0.000882 -0.00192 -0.00105
(-1.38) (-0.50) (-1.51) (-0.59)
Observations 119 119 119 119
R-squared 0.7501 0.7334 0.7468 0.7296

investors (or the better underperformers) survived the bankruptcy of this the first specification, we take into account the number of trades per-
important brokerage house in Colombia.10 formed by each investor, in the second we consider the average number
In Table 7, we show the results of running cross-sectional regressions of shares in which each individual invests and, in the third, we consider
for the whole sample of individual investors (42,211 investors) to the relative trading volume of each investor. We find the following
analyze whether certain characteristics of investors help explain gross results:
and net returns. Three specifications are run for gross and net returns. In
1) “Trades” (columns 1 and 4): First, it is confirmed that higher trading
intensity (i.e., a higher number of trades) negatively impacts both
gross and net returns. Second, investors in the market for longer
10
We leave for future studies the application of tests using other market timing (variable “Time”) had lower gross returns and higher net returns. This
models.

8
U. Garay, F. Pulga Heliyon 7 (2021) e08583

Table 7. Trading impact on individual investors performance. This table reports the impact of trading characteristics on individual investors performance. The
dependent variables are the gross and net returns in excess of the one-month Colombian T-bill rate. Trading characteristics are calculated by investor: Trades accounts
for the monthly average of transactions. Shares is the number of stocks traded on a monthly basis. Mktsh is the relative traded value per month. Time is the number of
months between the first and the last trade. Spread is the average monthly ratio between the daily closing price and the transaction price minus one. For purchases,
spread is multiplied by minus one. Note: t-statistics in parentheses. */**/*** indicate that the coefficient estimates are significantly different from zero at the 10%, 5%,
1%, respectively.
Gross risk-adjusted return Net risk-adjusted return

(1) (2) (3) (4) (5) (6)

Trades -0.000000695*** -0.000000509***
(-7.21) (-4.98)
Trades  Time 5.36e-09*** 3.76e-09***
(6.29) (4.16)
Shares -0.00000957* 0.0000107**
(-1.89) (1.99)
Shares  Time -0.000000301*** -0.000000513***
(-5.21) (-8.39)
Mktsh -1.602*** -0.913**
(-4.59) (-2.47)
Mktsh  Time 0.0122*** 0.00630*
(3.99) (1.94)
Time -0.00000188*** 0.00000401*** -0.00000172*** 0.00000168*** 0.00000930*** 0.00000179***
(-5.65) (5.91) (-5.23) (4.75) (12.96) (5.14)
Spd -0.000359 0.00107 -0.000850 -0.000842 0.000671 -0.00129
(-0.15) (0.44) (-0.35) (-0.33) (0.26) (-0.50)
Constant -0.00506*** -0.00513*** -0.00509*** -0.00553*** -0.00576*** -0.00555***
(-200.37) (-103.72) (-207.22) (-206.94) (-109.99) (-213.70)

Observations 42,211 42,211 42,211 42,211 42,211 42,211

R-Squared 0.0024 0.0077 0.0015 0.0017 0.0070 0.0011

finding suggests that variable Time in the market, which can be investors present in the Colombian stock market during the sample
regarded as a proxy measure of investor experience, allows the period (see Table 8). The results indicate that only institutional investors
investor to “learn to manage” transaction costs. However, an inter- belonging to the fifth quintile (the quintile corresponding to traders with
action variable between the number of trades and the length of time the most transactions) exhibited alphas that were negative and signifi-
an investor was in the market during the sample period (2006–2016) cant at the 1% level on both a gross and net excess return basis. In the
yields a positive and significant coefficient for both the gross and net case of the regression for net returns, institutional traders belonging to
return regressions. This important finding suggests that investors that quintiles 1 and 2 also had negative alphas (on both a 5% and 10% basis,
are more active in their trading and with more experience in the depending on the regression). Overall, the results given in Table 8 sug-
market are able to earn higher gross and net returns. gest that the underperformance of institutional investors in the Colom-
2) “Shares” (columns 2 and 5): Variable Shares represents the average bian stock market (in relation to trading intensity) was less severe than
number of stocks (companies) that an investor traded during the that recorded by individual investors, which is consistent with institu-
sample period. This variable can be regarded as a measure of an in- tional investors being more informed and better able to handle trading
vestor's stock diversification. Regression results indicate that in- costs than retail investors.
vestors who trade in a larger number of stocks tend to have lower
gross returns but higher net returns. This evidence suggests that in- 5. Conclusions, possible extensions and implications
vestors “learn to manage” their transaction costs by trading more
stocks. An interaction variable between Shares and the lengths of time In this paper, we have determined that individual investors in the
an investor has been in the market is negative for both specifications, Colombian stock market experienced negative abnormal returns on a
indicating that the performance of investors trading in a greater gross return basis that ranged between 4% and 4.3% per year (depending
number of shares and doing so for a longer period was negatively on whether the alpha was estimated using the CAPM, the Fama-French
impacted. This result is consistent with other evidence noted earlier model or the Carhart model) between 2006 and 2016. When trans-
(Ivkovic et al., 2008) suggesting that individual investors concen- action costs are considered, the underperformance of retail investors
trating their portfolios among a relatively small number of shares becomes even more pronounced, and the most active traders perform
tend to outperform other investors, presumably because of the lower worse than less active traders even on a gross excess return basis. These
information costs that they incur. findings are even more disappointing for households when one considers
3) “Volume” (columns 3 and 6): The results for these regressions are that the COLCAP index declined by 5.8% per year during the period of
similar to those performed for trades (part 1). This is not surprising, as study. These results were obtained after analyzing the stock transactions
the correlation between trades and volume is close to 0.9. Once again, executed by the universe of retail investors on the Colombian Stock Ex-
the interaction variable (in this case, between variables Volume and change during the sample period. The underperformance of households
Time) suggests that investors that are more active (measured by the becomes even bleaker when transaction costs are considered.
volume of stocks traded) and with more experience are able to earn We found that the average individual investor biases its portfolio
higher gross and net returns. toward small, low-beta, and value stocks and turns over approximately
8.8 % of its portfolio monthly. We also determined that the most active
Finally, and as a last extension, we proceeded to run the regressions of traders underperformed relative to less active traders even on a gross
trading intensity (sorted by quintiles) and performance for institutional return basis (measuring trading activity by either the number of trades or

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 U. Garay, F. Pulga
Table 8. Institutional investors’ performance by trades. This table reports estimates of the CAPM, the Fama and French 3-factor model and the Carhart 4-factor model for institutional investors at the Colombian Stock
Exchange from 2006 to 2016 sorted by quantiles of trades. Panel A exhibits the coefficient estimates on gross excess returns and Panel B on net excess returns. Market is the return in excess of the Colombian market index
(COLCAP) relative to the one-month T-bill rate. SMB is the return on a portfolio of small cap stocks minus big cap stocks. HML is the return on a portfolio long in high book-to-market ratio and short in low book-to-market
ratio. WML is the return on a portfolio long on winner stocks during the previous 12 months and short on losers shares during the same period. Note: t-statistics in parentheses. */**/*** indicate that the coefficient estimates
are significantly different from zero at the 10%, 5%, 1%, respectively.
Trades CAPM 3-Factor 4-Factor

Alpha Market Alpha Market SMB HML Alpha Market SMB HML WML
Panel A. Gross risk-adjusted returns
Group 1 - Low -0.00283* 0.930*** -0.00268 0.944*** 0.0635 -0.0307 -0.00270 0.945*** 0.0653 -0.0308 0.00838
(-1.76) (33.85) (-1.66) (30.58) (1.12) (-0.57) (-1.66) (29.88) (1.12) (-0.57) (0.16)
Group 2 -0.00247 0.948*** -0.00258* 0.940*** -0.0438 0.0286 -0.00266* 0.944*** -0.0360 0.0281 0.0371
(-1.66) (37.30) (-1.71) (32.81) (-0.83) (0.57) (-1.76) (32.26) (-0.67) (0.56) (0.79)
Group 3 -0.00160 0.984*** -0.00166 0.976*** -0.0292 -0.00463 -0.00172 0.978*** -0.0242 -0.00495 0.0240
(-1.14) (41.20) (-1.18) (36.23) (-0.59) (-0.10) (-1.21) (35.51) (-0.48) (-0.11) (0.54)
Group 4 -0.00136 0.915*** -0.00149 0.894*** -0.0590 -0.0363 -0.00153 0.896*** -0.0557 -0.0365 0.0159
(-1.12) (44.08) (-1.24) (39.02) (-1.40) (-0.91) (-1.26) (38.19) (-1.29) (-0.91) (0.42)
Group 5 - High -0.00319*** 0.698*** -0.00329*** 0.682*** -0.0469 -0.0167 -0.00334*** 0.685*** -0.0428 -0.0170 0.0198
10

(-3.44) (44.04) (-3.57) (38.84) (-1.45) (-0.55) (-3.60) (38.11) (-1.30) (-0.55) (0.68)
Panel B. Net risk-adjusted returns
Group 1 - Low -0.00348** 0.929*** -0.00334** 0.942*** 0.0594 -0.0287 -0.00335** 0.943*** 0.0606 -0.0288 0.00596
(-2.15) (33.56) (-2.05) (30.27) (1.04) (-0.53) (-2.04) (29.57) (1.04) (-0.53) (0.12)
Group 2 -0.00295* 0.947*** -0.00306** 0.938*** -0.0465 0.0325 -0.00315** 0.943*** -0.0383 0.0320 0.0390
(-1.97) (36.98) (-2.03) (32.53) (-0.88) (0.65) (-2.07) (32.00) (-0.71) (0.64) (0.82)
Group 3 -0.00203 0.985*** -0.00210 0.976*** -0.0309 -0.00241 -0.00215 0.979*** -0.0254 -0.00276 0.0261
(-1.45) (41.34) (-1.49) (36.34) (-0.63) (-0.05) (-1.52) (35.64) (-0.50) (-0.06) (0.59)
Group 4 -0.00171 0.915*** -0.00184 0.893*** -0.0602 -0.0362 -0.00187 0.895*** -0.0569 -0.0364 0.0159
(-1.40) (44.01) (-1.53) (38.97) (-1.43) (-0.91) (-1.55) (38.14) (-1.32) (-0.91) (0.42)
Group 5 - High -0.00344*** 0.698*** -0.00355*** 0.683*** -0.0470 -0.0154 -0.00359*** 0.685*** -0.0426 -0.0157 0.0209
(-3.71) (44.00) (-3.84) (38.79) (-1.45) (-0.50) (-3.88) (38.08) (-1.29) (-0.51) (0.72)

Heliyon 7 (2021) e08583

U. Garay, F. Pulga Heliyon 7 (2021) e08583

volume) and that bad timing can explain the underperformance of in- To restore investor confidence in the stock market, the offering of
vestors, but only prior to the bankruptcy of Interbolsa, which occurred in broad financial education programs for small investors will be of upmost
October of 2012. This finding is consistent with fact that only the best importance as well as the reinforcement of regulation and the improve-
investors (or better underperformers) survived the bankruptcy of this ment of corporate governance standards. Regarding the latter issue,
important brokerage house. Importantly, we found that investors that are Wyman (2016) comments that the Colombian stock exchange still faces a
more active and with more experience in the market were able to earn number of challenges that may restrain the tendency to invest in the
higher gross and net returns. Finally, we found that institutional investors exchange (most notably, there is a need to reinforce the protection of the
in the Colombian stock market (in relation to trading intensity) also rights of minority shareholders so that issuers can draw interest from a
underperformed but at a less severe level than that recorded by indi- wide range of investors), notwithstanding important efforts that have
vidual investors. already been made to improve corporate governance practices in
Our results are in conflict with Grossman and Stiglitz's (1980) rational Colombia. Furthermore, there is a need to improve liquidity so that
expectations model but can be consistent with models in which investors transaction costs can be reduced, new investors can be attracted and
suffer from overconfidence. It could be argued (but this is only a specu- systemic and liquidity risks can be decreased. The strengthening of the
lation) that overconfidence could be penalized more severely (in terms of private pension system accompanied by increased interest from foreign
lower gross and net returns) in emerging markets (which tend to be investors and new democratization programs will certainly help in
characterized by higher transaction costs, information asymmetries, and increasing liquidity and market participation by retail investors.
corporate governance issues) compared to the case of trading in devel-
oped capital markets, where most studies on the performance of indi- Declarations
vidual investors have been undertaken. For the Colombian stock market,
Karolyi (2015) finds that while this market fares relatively well in terms Author contribution statement
of legal investor protection, it still suffers from market capacity con-
straints, operational inefficiencies and corporate opacity. Urbi Garay and Fredy Pulga: Conceived and designed the experi-
Our results are also consistent with evidence presented in a recent ments; Performed the experiments; Analyzed and interpreted the data;
paper by Lyngnes (2020), who used unique portfolio holdings data of all Contributed reagents, materials, analysis tools or data; Wrote the paper.
domestic retail investors on the Oslo Stock Exchange (OSE) for 1993 to
2006 and found that as investors gain trading experience, their ability to
turn portfolio concentration into excess returns improves. The impor- Funding statement
tance of retail investors' experience for performance is also highlighted
by the results reported by Arnold et al. (2020), who found that attention This research did not receive any specific grant from funding agencies
triggers (measured using the trading records of a large broker who sends in the public, commercial, or not-for-profit sectors.
standardized push messages to the cell phones of retail investors) in-
crease investors’ risk-taking and that attention triggers are more relevant Data availability statement
to the financial risk-taking of male, less experienced and younger in-
vestors. In a similar vein, Barber et al. (2021) find, using data from Data will be made available on request.
Robinhood, that investors using this app engage in more
attention-induced trading than other retail investors and argue that the
evidence is consistent with Robinhood attracting relatively inexperi- Declaration of interests statement
enced investors. As we note above, we found investors with more expe-
rience and more active in the market to be able to earn higher gross and The authors declare no conflict of interest.
net returns. One could argue more experienced investors are able to
shield themselves from attention triggers, that this helps them outper- Additional information
form other investors and that this outperformance is augmented as they
trade more. No additional information is available for this paper.
We could extend this study by analyzing whether individual in-
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