Trading is the mechanism of the economist's ‘invisible hand,’ the means by which price discovery occurs. We use daily shareholdings data from the Australian equities clearinghouse to investigate the impact of the trading imbalances of investor categories on stock returns. Our evidence does not contradict the behavioral finance assumption that the trading of individual investors contributes to price discovery. Furthermore, we find that, while the trading of all investor categories Granger-causes returns, returns Granger-cause trading only for the individual investor category. That is, in the short term of up to 1 month, only individual investors engage in feedback trading.
Colwell, D., Henker, J., & Walter, T. (2008). Effect of investor category trading imbalances on stock returns. International Review of Finance, 8(3/4), 179-206. https://doi.org/10.1111/j.1468-2443.2008.00081.x