Individual Investors and the Financial Crisis

Abstract

This paper studies the trading behavior of individual Chinese investors before and during the recent financial crisis. We have three major findings: (i) individual investors did not withdraw their capital from the equity market during the crisis; instead, they reduced investment more in the pre-crisis period, especially following portfolio gains; (ii) the net flow decisions were influenced by past positive returns, but not by past losses; the net flow patterns were consistent with the disposition effect, which was even stronger during the crisis; (iii) during the crisis, investors revised their portfolios to hold relatively safer and more liquid stocks, and this pattern is more evident for small investors.