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Are the least successful traders those most likely to exit the market? A survival analysis contribution to the efficient market debate

Are the least successful traders those most likely to exit the market? A survival analysis contribution to the efficient market debate
Are the least successful traders those most likely to exit the market? A survival analysis contribution to the efficient market debate
Concerns regarding the assumptions of the Efficient Market Hypothesis have led to a greater emphasis on how the behaviour of different groups of traders might impact the evolution of financial markets; ideas encapsulated in the Adaptive Markets Hypothesis (AMH). A key assumption of the AMH is that the dynamics of competition and natural selection will drive ‘noise traders’, those least likely to push prices to efficient levels because they follow sub-optimal trading strategies, to exit the market. To test the key assumptions of the AMH, survival analysis is employed to examine the behaviour of retail spread-traders, a group who are widely reported to include many noise traders. Analysis of the trades executed by 5,164 individuals in the period 24th March 2006 to 7th February 2012 found that the least profitable and those who adopted ill-disciplined trading strategies tended to cease trading sooner than others. These findings are consistent with the AMH. However, profitable traders were also found to be more likely to cease trading than the average trader and a V-shaped relationship was found between a trader’s Sharpe ratio and their likelihood of ceasing to trade (cf. the average trader). Furthermore, during the financial crisis of 2008-09, the disposition effect of traders and the proportion of noise traders increased and throughout the period of the study, the ill-discipline of new generations of traders increased. The results suggest that the forces underpinning the AMH are complex and the move towards market efficiency may not be as straightforward as some expect.
Behaviour decision, Financial crisis, Irrational trading, Market efficiency, Survival analysis
0377-2217
330-345
Ma, Tiejun
1f591849-f17c-4209-9f42-e6587b499bae
Fraser-mackenzie, Peter AF
0582f787-6e98-45ec-aeb5-4e563f3f39c5
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03
Kansara, Amey, Pramodkumar
e9991d2e-1d75-41df-b475-0e00f5a806e8
Johnson, Johnnie
6d9f1a51-38a8-4011-a792-bfc82040fac4
Ma, Tiejun
1f591849-f17c-4209-9f42-e6587b499bae
Fraser-mackenzie, Peter AF
0582f787-6e98-45ec-aeb5-4e563f3f39c5
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03
Kansara, Amey, Pramodkumar
e9991d2e-1d75-41df-b475-0e00f5a806e8
Johnson, Johnnie
6d9f1a51-38a8-4011-a792-bfc82040fac4

Ma, Tiejun, Fraser-mackenzie, Peter AF, Sung, Ming-Chien, Kansara, Amey, Pramodkumar and Johnson, Johnnie (2021) Are the least successful traders those most likely to exit the market? A survival analysis contribution to the efficient market debate. European Journal of Operational Research, 299 (1), 330-345. (doi:10.1016/j.ejor.2021.08.050).

Record type: Article

Abstract

Concerns regarding the assumptions of the Efficient Market Hypothesis have led to a greater emphasis on how the behaviour of different groups of traders might impact the evolution of financial markets; ideas encapsulated in the Adaptive Markets Hypothesis (AMH). A key assumption of the AMH is that the dynamics of competition and natural selection will drive ‘noise traders’, those least likely to push prices to efficient levels because they follow sub-optimal trading strategies, to exit the market. To test the key assumptions of the AMH, survival analysis is employed to examine the behaviour of retail spread-traders, a group who are widely reported to include many noise traders. Analysis of the trades executed by 5,164 individuals in the period 24th March 2006 to 7th February 2012 found that the least profitable and those who adopted ill-disciplined trading strategies tended to cease trading sooner than others. These findings are consistent with the AMH. However, profitable traders were also found to be more likely to cease trading than the average trader and a V-shaped relationship was found between a trader’s Sharpe ratio and their likelihood of ceasing to trade (cf. the average trader). Furthermore, during the financial crisis of 2008-09, the disposition effect of traders and the proportion of noise traders increased and throughout the period of the study, the ill-discipline of new generations of traders increased. The results suggest that the forces underpinning the AMH are complex and the move towards market efficiency may not be as straightforward as some expect.

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Survival Paper_Tiejun_2021_Accepted - Accepted Manuscript
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More information

Submitted date: 30 June 2021
Accepted/In Press date: 1 September 2021
e-pub ahead of print date: 9 September 2021
Keywords: Behaviour decision, Financial crisis, Irrational trading, Market efficiency, Survival analysis

Identifiers

Local EPrints ID: 451321
URI: http://eprints.soton.ac.uk/id/eprint/451321
ISSN: 0377-2217
PURE UUID: 60ef21ac-cadb-44a3-a5b2-759577116e37
ORCID for Ming-Chien Sung: ORCID iD orcid.org/0000-0002-2278-6185

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Date deposited: 21 Sep 2021 16:30
Last modified: 28 Apr 2022 01:53

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Contributors

Author: Tiejun Ma
Author: Peter AF Fraser-mackenzie
Author: Ming-Chien Sung ORCID iD
Author: Amey, Pramodkumar Kansara
Author: Johnnie Johnson

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