Towards an understanding of the impact of the online news environment on individual traders’ financial decisions

Abstract

This thesis, which is divided into three papers, examines the impact of the online news environment on individual traders’ financial risk-taking and decision-making. The thesis employs a news analytics dataset secured from Thomson Reuters that includes over 35 million news items and two individual-level trading datasets secured from two UK-based retail trading brokerages that include seven million trades placed by over 44,000 individual traders. The first paper examines the role of mobile devices in altering the news-individual trading relationship. The results suggest that mobile devices are associated with more pro-sentiment trading patterns. In particular, individual traders raise their trading volume and frequency to buy/sell the market following an increase in positive/negative news sentiment and reduce the trading activities to buy/sell the market following an increase in negative/positive news sentiment. The mobile devices’ effects also spill over to the PC channel, leading to more pro-sentiment trading patterns on the PC channel as well. The results also suggest that mobile devices have little impact on how news sentiment affects individuals’ trading performance. This paper reveals how mobile devices alter individuals’ responses to online news sentiment, contributing to understanding the effects of mobile devices on news dissemination in financial markets through their impact on individual traders. The second paper examines how the news environment affects individual traders’ sequential decision-making. In particular, the paper examines how the impact of individual traders’ prior trading gains on their subsequent trading decisions depends on (i) the neutral news volume and (ii) the positive and negative news sentiments. The results suggest that individuals increase trade size in response to prior gains, but the magnitude of the increase is dependent on the type of news sentiment environment in which the prior gains were made — the news sentiment that is consistent/inconsistent with the prior gaingenerating decisions amplifying/reducing the impact of the prior gains. Additionally, while the number of neutral news can lead individuals to increase their following trade size, it does not affect the relationship between prior gains and subsequent trade size. This study complements previous literature on individuals’ sequential decision-making. The results demonstrate that the impact of prior outcomes does not stay consistent across contexts, but instead, it depends on contextual factors such as the sentiment in the news environment. The third paper examines to what extent the news sentiment affects traders’ disposition effect, which refers to the phenomenon that traders tend to be willing to close positions in gains but be reluctant to close positions in losses. The results suggest that individuals exhibit a greater disposition effect when shortselling the market. More importantly, it is found that news relevant to equity market indices (e.g., the FTSE100) emerging during the period when a trader holds the positions has a significant effect on the trader’s propensity to close the positions. When the news environment is dominated by negative sentiment (i.e. news sentiment that predicts the market would fall), the propensity to close positions in losses is considerably higher, and the disposition effects are significantly reduced, compared to when the news is dominated by positive sentiment. This paper complements previous literature on the relationship between financial news and disposition effect by demonstrating the moderating effect of the news on traders’ disposition effects at the individual trader’s level. Taken together, this thesis contributes to understanding the impact of the online news environment on individual traders’ financial decision-making and risk-taking through the lens of three important elements: “mobile devices”, “prior gains”, and “unrealized returns”. The thesis extends previous literature on financial news dissemination via individual traders across financial markets. It has important implications for those dealing with individual traders and regulating individual trading activities

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Identifiers

ORCID for He He: orcid.org/0000-0003-1167-4820

ORCID for Ming-Chien Sung: orcid.org/0000-0002-2278-6185

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