On science
The inner workings of the stock market’s black box Our research has increased the understanding of how investors behave, writes Aalto Distinguished Professor Matti Keloharju. Illustration Terhi Adler
F
OR DECADES, finance researchers
saw the stock market as a black box; its outputs – prices and trading volumes – were known, but how these outputs were generated was largely a mystery. Availability of better data has changed this picture: now, many researchers examine data on the actual trades of some investor segments, such as customers of retail brokerage firms. I and my colleagues and students have been at the forefront of this revolution, utilizing registry data on all of the traders on the Finnish stock market. Our data set is structured as a panel, which allows us to follow 1.7 million investors throughout the entire sample period of 20 years. Except for foreign investors, who largely appear as a big
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lump in our data, we can observe what each investor has done – or has not done – on a daily basis. The market literally clears within the dataset: on every day and for every stock, the volume of buy transactions is identical to the volume of sell transactions. This is a big advantage relative to other data sets, which tend to cover only a small part of the investor population.
Detailed investor information Our data set offers a wealth of information on ownership and trading. Not only does it indicate how much each investor owns of each stock at each point of time, but it also reveals the reason for all the changes in ownership.
Regular stock market trades are the most common reason for a change of ownership, but the data set also covers other events, such as participation in equity offerings, gifts and inheritances. Another important feature of the data set is that it includes detailed information on the investors. We know each investor’s institutional type and various socioeconomic attributes of household investors. Some of our studies have also linked the data set with other data sets, such as data on individual investors’ intelligence and speeding tickets as well as information on investors’ buy and sell orders, including those orders that do not lead to a trade. What can we learn from this research? One important result is that investors,