A Behavioral Finance Perspective on Trade Imbalance and Stock Prices

The link between stock prices and investor trading especially retail in­vestor trading is at once both obvious and perplexing. Which is the cause which the effect and who or what do we blame when stock market prices go wrong? Most theories of stock price anomalies rely on investor error and many assume that retail investors are the source of the error. In this monograph we explore this assumption. We consider the effect of investor category demand imbalance on prices across the entire stock market. We then focus on demand imbalance as a predictor of stock price 'bubble' crashes. Finally we consider the cause and effect of investor category demand imbalances on stock prices as they display the dramatic price increases and falls that characterize a bubble. This monograph is required reading for anyone tempted to rely on individual investor decision making for an explanation of stock market prices.