{"id":21614,"date":"2024-03-14T17:00:00","date_gmt":"2024-03-14T09:00:00","guid":{"rendered":"https:\/\/www.tejwin.com\/?post_type=insight&#038;p=21614"},"modified":"2024-07-03T09:21:47","modified_gmt":"2024-07-03T01:21:47","slug":"analysis-of-retail-investors-trading-in-taiwan-stock-market","status":"publish","type":"insight","link":"https:\/\/www.tejwin.com\/en\/insight\/analysis-of-retail-investors-trading-in-taiwan-stock-market\/","title":{"rendered":"Empirical Analysis of Retail Investors Trading Behavior in the Taiwan Stock Market\u00a0"},"content":{"rendered":"\n<figure class=\"wp-block-image size-full\"><img fetchpriority=\"high\" decoding=\"async\" width=\"940\" height=\"627\" src=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/1bIJIoKaItKwfvShEKZun3A.png\" alt=\"\" class=\"wp-image-17064\" srcset=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/1bIJIoKaItKwfvShEKZun3A.png 940w, https:\/\/www.tejwin.com\/wp-content\/uploads\/1bIJIoKaItKwfvShEKZun3A-300x200.png 300w, https:\/\/www.tejwin.com\/wp-content\/uploads\/1bIJIoKaItKwfvShEKZun3A-150x100.png 150w, https:\/\/www.tejwin.com\/wp-content\/uploads\/1bIJIoKaItKwfvShEKZun3A-768x512.png 768w\" sizes=\"(max-width: 940px) 100vw, 940px\" \/><\/figure>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69d9561ed645b\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"ez-toc-cssicon\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69d9561ed645b\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tejwin.com\/en\/insight\/analysis-of-retail-investors-trading-in-taiwan-stock-market\/#Preface\" >Preface<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tejwin.com\/en\/insight\/analysis-of-retail-investors-trading-in-taiwan-stock-market\/#Data_and_Factors_of_Retail_Investors_in_Taiwan_Stock_Market\" >Data and Factors&nbsp;of Retail Investors in Taiwan Stock Market<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tejwin.com\/en\/insight\/analysis-of-retail-investors-trading-in-taiwan-stock-market\/#Factor_Analysis\" >Factor Analysis&nbsp;<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tejwin.com\/en\/insight\/analysis-of-retail-investors-trading-in-taiwan-stock-market\/#Portfolio_Analysis\" >Portfolio Analysis&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tejwin.com\/en\/insight\/analysis-of-retail-investors-trading-in-taiwan-stock-market\/#Factor_Performance_Analysis\" >Factor Performance Analysis&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tejwin.com\/en\/insight\/analysis-of-retail-investors-trading-in-taiwan-stock-market\/#Information_Coefficient_Analysis\" >Information Coefficient Analysis&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tejwin.com\/en\/insight\/analysis-of-retail-investors-trading-in-taiwan-stock-market\/#Turnover_Rate_Analysis\" >Turnover Rate Analysis&nbsp;<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tejwin.com\/en\/insight\/analysis-of-retail-investors-trading-in-taiwan-stock-market\/#Backtesting_and_Performance_Analysis\" >Backtesting and Performance Analysis&nbsp;<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.tejwin.com\/en\/insight\/analysis-of-retail-investors-trading-in-taiwan-stock-market\/#Backtesting\" >Backtesting<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.tejwin.com\/en\/insight\/analysis-of-retail-investors-trading-in-taiwan-stock-market\/#Performance_Analysis\" >Performance Analysis<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.tejwin.com\/en\/insight\/analysis-of-retail-investors-trading-in-taiwan-stock-market\/#Conclusion\" >Conclusion&nbsp;<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Preface\"><\/span>Preface<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In mature markets such as Europe and America, institutional investors account for the largest proportion, and studies have shown that the trading behavior of institutional investors has predictive power for stock prices. However, as shown in the figure1 below, <span style=\"text-decoration: underline;\" class=\"ek-underline\"> in the Taiwan stock market, retail investors account for the highest proportion and have the highest trading volume in the market<\/span>, indicating that non-institutional investors have an important position in the Taiwan market. Therefore, this article uses the data on shareholder diversification from the Taiwan Depository &amp; Clearing Corporation (TDCC) to study<mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-black-color\"> the relationship between retail investor trading behavior and stock expected returns and to evaluate t<\/mark>he feasibility of investment strategies.&nbsp;<\/p>\n\n\n\n<p>Retail investors, due to their lagging information, exhibit a negative relationship between their trading behavior and stock price trends. When they are optimistic and buy stocks, prices often fall; conversely, when they are pessimistic and sell stocks, prices often rise. Since there has been little research on using shareholder who hold 1-5 shares category as a proxy variable for retail investors, <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">this article uses factor analysis to delve into the relationship between retail investor trading behavior and stock expected returns <\/mark>and examines their predictive ability for stock prices.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large caption-align-center\"><img decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/types-of-traders-1024x576.png\" alt=\"\" class=\"wp-image-21686\" srcset=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/types-of-traders-1024x576.png 1024w, https:\/\/www.tejwin.com\/wp-content\/uploads\/types-of-traders-300x169.png 300w, https:\/\/www.tejwin.com\/wp-content\/uploads\/types-of-traders-150x84.png 150w, https:\/\/www.tejwin.com\/wp-content\/uploads\/types-of-traders-768x432.png 768w, https:\/\/www.tejwin.com\/wp-content\/uploads\/types-of-traders-1536x864.png 1536w, https:\/\/www.tejwin.com\/wp-content\/uploads\/types-of-traders.png 1920w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><figcaption class=\"wp-element-caption\">Figure1. Types of Traders. Source: Taiwan Stock Exchange. Data Period: 2023\/12<\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Data_and_Factors_of_Retail_Investors_in_Taiwan_Stock_Market\"><\/span>Data and Factors&nbsp;of Retail Investors in Taiwan Stock Market<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">This study uses Taiwan stock data provided by TEJ, including stock price data, shareholder diversification data from TDCC, and stock daily trading information<\/mark>. To represent the entire Taiwan stock market, the sample is taken from common stocks listed on the TWSE and OTC market from January 2016 to December 2023, excluding factors such as new stocks and low-priced stocks.&nbsp;<\/p>\n\n\n\n<p>Generally, retail investors, due to their lack of professional investment knowledge and lagging information, are easily influenced by short-term news factors. The shareholder diversification table is mainly grouped by shareholder ID, divided into 15 different levels based on the number of shares held (1 lot or less (1-999 shares), 1 to 5 lots, 5 to 10 lots&#8230;1000 lots or more), and discloses the number of shareholders, shares held, and shareholding ratio according to this classification.<\/p>\n\n\n\n<p>Therefore, the method of constructing retail investor factors in this study will <span style=\"text-decoration: underline;\" class=\"ek-underline\">use short-term changes in holdings in the 1-5 lots category from the TDCC shareholder diversification data to explore the relationship between retail investor trading behavior and stock returns<\/span>.&nbsp;The relevant retail investor factors are constructed as follows:<\/p>\n\n\n\n<figure class=\"wp-block-table caption-align-center is-style-regular\"><table class=\"has-white-background-color has-background\"><thead><tr><th>Variables<\/th><th>Variable descriptions<\/th><th>Variable Formula<\/th><\/tr><\/thead><tbody><tr><td>Chg_Shareholder<sub>t<\/sub><\/td><td>Weekly change in number of shareholders&nbsp;<\/td><td>Shareholder<sub>t<\/sub>&nbsp;\/Shareholder<sub>t\u22121&nbsp;<\/sub><\/td><\/tr><tr><td>Chg_Holdingshares<sub>t<\/sub><\/td><td>Weekly change in number of shares held&nbsp;<\/td><td>Holdingshares<sub>t<\/sub>&nbsp;\/Holdingshares<sub>t\u22121&nbsp;<\/sub><\/td><\/tr><tr><td>Chg_Holdingpercent<sub>t<\/sub><\/td><td>Weekly change in shareholding ratio&nbsp;<\/td><td>Holdingpercent<sub>t&nbsp;<\/sub>\/Holdingpercent<sub>t\u22121<\/sub>&nbsp;<\/td><\/tr><\/tbody><\/table><figcaption class=\"wp-element-caption\">Table1. Retail Investor Factor Description and Formulas<\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Factor_Analysis\"><\/span><strong>Factor Analysis<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Factor analysis begins with portfolio analysis to select the best performers among the three factors, and then use alphalens-tej to further analyze the selected retail factor. The predictive power of the factors is evaluated in terms of <strong>factor performance, information coefficients, and turnover rates<\/strong>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Portfolio_Analysis\"><\/span><strong>Portfolio Analysis<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The portfolio analysis methodology is to calculate the three retail factors according to Table 1 every Monday, and use the factors to rank the stock incrementally into 10 groups to form a portfolio by equal weighting allocation, and then re-adjust the portfolio after holding it for one week. Finally, the average returns of the Top, Bottom, and Spread Quantiles are examined to determine which retail factor is the most predictive of future stock returns.<\/p>\n\n\n\n<p>Table 2 shows the average returns of equal-weighted portfolios from January 2016 to December 2023, sorted by the three retail factors on a weekly basis. The results show that the investment portfolios of the <strong>Bottom Quantiles<\/strong> for Chg_Shareholder (weekly change in number of shareholders), Chg_Holdingshares (weekly change in number of shares held), and Chg_Holdingpercent (weekly change in shareholding ratio) factors <strong>outperform the Top Quantiles<\/strong>.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-table caption-align-center is-style-regular\"><table class=\"has-white-background-color has-background\"><thead><tr><th><\/th><th>Chg_Shareholder<\/th><th>Chg_Holdingshares<\/th><th>Chg_Holdingpercent<\/th><\/tr><\/thead><tbody><tr><td>Mean Period Wise Return Top Quantiles (bps)&nbsp;<\/td><td>3.515<\/td><td>3.635<\/td><td>2.656<\/td><\/tr><tr><td><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">Mean Period Wise Return Bottom Quantiles (bps)&nbsp;<\/mark><\/td><td>7.684<\/td><td>8.001<\/td><td>8.590<\/td><\/tr><tr><td>Mean Period Wise Spread (bps)&nbsp;<\/td><td>-4.254<\/td><td>-4.476<\/td><td>-6.050<\/td><\/tr><\/tbody><\/table><figcaption class=\"wp-element-caption\">Table2. Average Daily Returns (bps) of Retail Investor Factor Top, Bottom, and Spread Quantiles. Data Period: 2016\/1-2023\/12&nbsp;<\/figcaption><\/figure>\n\n\n\n<div style=\"height:22px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Factor_Performance_Analysis\"><\/span><strong>Factor Performance Analysis<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Factor performance analysis mainly uses factor ranking grouping and equal-weight allocation to establish investment portfolios, observing whether there is a monotonic relationship between average returns and rankings. The results in Figure 2 shows that investment portfolios constructed using retail investor factors have a clear monotonic decreasing relationship between average returns and rankings, whether for 1 day, 5 days, 10 days, or 22 days in the future, with the first group (Bottom Quantiles) significantly outperforming the 10th group (Top Quantiles) in terms of returns. <\/p>\n\n\n\n<p>This not only demonstrates <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">the negative correlation between retail investor trading behavior and stock returns<\/mark> but also <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">indicates the potential to use this relationship to predict future stock returns<\/mark>. Create buy signals when retail investors sell a large number of stocks and sell signals when they buy a large number of stocks.<\/p>\n\n\n\n<p>(Note: The 1st group is the Bottom Quantiles, and the 10th group is the Top Quantiles) <\/p>\n\n\n\n<figure class=\"wp-block-image size-large caption-align-center is-style-default\"><img decoding=\"async\" width=\"1024\" height=\"332\" src=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/mean-period-wise-return-1024x332.png\" alt=\"\" class=\"wp-image-21620\" srcset=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/mean-period-wise-return-1024x332.png 1024w, https:\/\/www.tejwin.com\/wp-content\/uploads\/mean-period-wise-return-300x97.png 300w, https:\/\/www.tejwin.com\/wp-content\/uploads\/mean-period-wise-return-150x49.png 150w, https:\/\/www.tejwin.com\/wp-content\/uploads\/mean-period-wise-return-768x249.png 768w, https:\/\/www.tejwin.com\/wp-content\/uploads\/mean-period-wise-return.png 1223w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><figcaption class=\"wp-element-caption\">Figure2. Average returns of Chg_Holdingpercent Retail Factor Quantiles. Data Period: 2023\/12. Data Period: 2016\/1-2023\/12&nbsp;<\/figcaption><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Information_Coefficient_Analysis\"><\/span><strong>Information Coefficient Analysis<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The information coefficient is the Spearman&#8217;s rank correlation coefficient between factors and future stock returns, abbreviated as IC. An IC with a value greater than 0 indicates a positive correlation between factors and future stock returns; conversely, an IC with a value less than 0 indicates a negative correlation between factors and future stock returns. The results in Table 3 show that the IC values of retail investor factors with future 1-day, 5-day, 10-day, and 22-day stock returns are all significantly negative, with IC (p-value) values of -0.005 (0.000), -0.008 (0.000), -0.010 (0.000), -0.012 (0.000).&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter size-full is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"426\" height=\"263\" src=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/Retail-Investor-Factor-IC-Values-1.png\" alt=\"\" class=\"wp-image-21720\" style=\"width:377px;height:auto\" srcset=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/Retail-Investor-Factor-IC-Values-1.png 426w, https:\/\/www.tejwin.com\/wp-content\/uploads\/Retail-Investor-Factor-IC-Values-1-300x185.png 300w, https:\/\/www.tejwin.com\/wp-content\/uploads\/Retail-Investor-Factor-IC-Values-1-150x93.png 150w\" sizes=\"(max-width: 426px) 100vw, 426px\" \/><figcaption class=\"wp-element-caption\">Table3. Retail Investor Factor IC Value<\/figcaption><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Turnover_Rate_Analysis\"><\/span><strong>Turnover Rate Analysis<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In the previous section analyzing the predictive ability of retail investor factors, there was no consideration given to commissions, slippage, and other related trading costs. However, in actual investment scenarios, <span style=\"text-decoration: underline;\" class=\"ek-underline\">transaction fees play a critical role in determining the success of investment strategies<\/span>. Therefore, this section conducts a turnover rate analysis to estimate the potential transaction fees that may arise when using retail investor factors to construct investment portfolios.&nbsp;<\/p>\n\n\n\n<p>Retail investor factor data is published weekly, so the 5-day turnover rate is observed at the same frequency. As a result, the average 5-day turnover rates of investment portfolios in the Top and Bottom Quantiles are approximately 0.58 and 0.56 times, equivalent to changing the stock list twice a month. Due to the high turnover rate, frequent stock exchange transactions may result in higher handling fees and erode most profits.<\/p>\n\n\n\n<p>To sum up, in portfolio analysis, all three retail investor factors exhibit a negative correlation with stock returns, with <strong><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">Chg_Holdingpercent (weekly change in shareholding ratio) showing the most predictive ability<\/mark><\/strong>. Secondly, in the alphalens-tej analysis, the Chg_Holdingpercent factor demonstrates a monotonic decreasing relationship between group ranking and average returns under different forecast periods. Additionally, the overall factor exhibits a significantly negative correlation with future stock returns. However, a high turnover rate of investment portfolios may lead to erosion of investment returns due to more frequent swaps in actual trading. Therefore, the subsequent sections of this article will further conduct simulation backtesting, <span style=\"text-decoration: underline;\" class=\"ek-underline\">considering actual commissions, slippage, liquidity, and other trading restrictions, to evaluate the performance of investment portfolios<\/span>.&nbsp;<\/p>\n\n\n\n<div style=\"border: 1px black; border-style: solid none; text-align: center; border-color: #296580; padding: 24px; margin-top: 24px; margin-bottom: 24px;\">\n<p style=\"margin: 0px; font-size: 24px; font-weight: bold; line-height: 1.5;\">Start Building Portfolios That Outperform the Market!<\/p>\n<div style=\"margin-top: 32px;\"><strong><a style=\"border: none; border-radius: 4px; background-color: #296580; color: white; font-size: 20px; width: fit-content; text-decoration: none; padding: 12px 30px 12px 30px;\" href=\"https:\/\/www.tejwin.com\/en\/databank-solution\/market-data\/\">TEJ Market Databank<\/a><\/strong><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Backtesting_and_Performance_Analysis\"><\/span><strong>Backtesting and Performance Analysis<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Backtesting\"><\/span>Backtesting<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Using Chg_Holdingpercent as an indicator, the top 10% of stocks with the highest selling volume among retail investors are selected to construct an investment portfolio. As the figures below, the weekly frequency investment portfolio performs lower than the market, while the monthly frequency portfolio slightly outperforms the market. Considering transaction costs, liquidity, and risk restrictions, the high turnover rate affects the performance of the weekly frequency portfolio, we suggest to use monthly frequency portfolio to further analyze the returns.&nbsp;<\/p>\n\n\n\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-28f84493 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<figure class=\"wp-block-image size-full is-resized caption-align-center\"><img loading=\"lazy\" decoding=\"async\" width=\"424\" height=\"301\" src=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/Performance-of-Weekly-Frequency-Adjusted-Investment.png\" alt=\"\" class=\"wp-image-21626\" style=\"width:416px;height:auto\" srcset=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/Performance-of-Weekly-Frequency-Adjusted-Investment.png 424w, https:\/\/www.tejwin.com\/wp-content\/uploads\/Performance-of-Weekly-Frequency-Adjusted-Investment-300x213.png 300w, https:\/\/www.tejwin.com\/wp-content\/uploads\/Performance-of-Weekly-Frequency-Adjusted-Investment-150x106.png 150w\" sizes=\"(max-width: 424px) 100vw, 424px\" \/><figcaption class=\"wp-element-caption\">Figure3. Performance of Weekly Frequency Adjusted Investment<\/figcaption><\/figure>\n<\/div>\n\n\n\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<figure class=\"wp-block-image size-full caption-align-center\"><img loading=\"lazy\" decoding=\"async\" width=\"426\" height=\"300\" src=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/Performance-of-Monthly-Frequency-Adjusted-Investment-Portfolio-.png\" alt=\"\" class=\"wp-image-21628\" srcset=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/Performance-of-Monthly-Frequency-Adjusted-Investment-Portfolio-.png 426w, https:\/\/www.tejwin.com\/wp-content\/uploads\/Performance-of-Monthly-Frequency-Adjusted-Investment-Portfolio--300x211.png 300w, https:\/\/www.tejwin.com\/wp-content\/uploads\/Performance-of-Monthly-Frequency-Adjusted-Investment-Portfolio--150x106.png 150w\" sizes=\"(max-width: 426px) 100vw, 426px\" \/><figcaption class=\"wp-element-caption\">Figure4. Performance of Monthly Frequency Adjusted Investment Portfolio&nbsp;<\/figcaption><\/figure>\n<\/div>\n<\/div>\n\n\n\n<p>As shown in Figure 5, <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">the performance of the portfolio continues to rise over<\/mark>, even after the impact of the 2018 and 2022 interest rate rising cycles. This suggests that although the portfolio&#8217;s short-term performance will be affected by the external general economic environment,<mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"> it will continue to deliver good performance as the boom cycle progresses and the negative factors fade away.<\/mark><\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"699\" height=\"321\" src=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/Cumulative-Returns-of-Monthly-Frequency-Investment-Portfolio.png\" alt=\"\" class=\"wp-image-21630\" srcset=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/Cumulative-Returns-of-Monthly-Frequency-Investment-Portfolio.png 699w, https:\/\/www.tejwin.com\/wp-content\/uploads\/Cumulative-Returns-of-Monthly-Frequency-Investment-Portfolio-300x138.png 300w, https:\/\/www.tejwin.com\/wp-content\/uploads\/Cumulative-Returns-of-Monthly-Frequency-Investment-Portfolio-150x69.png 150w\" sizes=\"(max-width: 699px) 100vw, 699px\" \/><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Performance_Analysis\"><\/span><strong>Performance Analysis<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Performance analysis observes cumulative returns, with both weekly and monthly frequency portfolios showing a continuous upward trend. However, it&#8217;s crucial to note that during interest rate hikes, there may be a long-term drawdown period. Risk analysis indicates that the maximum drawdown can reach 25-35%, and portfolios with long positions may be affected during pullbacks. It is recommended to combine other effective factors in stock selection indicators to avoid reduced profits due to high turnover rates.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-full caption-align-center\"><img loading=\"lazy\" decoding=\"async\" width=\"862\" height=\"451\" src=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/Maximum-Drawdown-Chart-of-Monthly-Frequency-Investment-Portfolio.png\" alt=\"\" class=\"wp-image-21632\" srcset=\"https:\/\/www.tejwin.com\/wp-content\/uploads\/Maximum-Drawdown-Chart-of-Monthly-Frequency-Investment-Portfolio.png 862w, https:\/\/www.tejwin.com\/wp-content\/uploads\/Maximum-Drawdown-Chart-of-Monthly-Frequency-Investment-Portfolio-300x157.png 300w, https:\/\/www.tejwin.com\/wp-content\/uploads\/Maximum-Drawdown-Chart-of-Monthly-Frequency-Investment-Portfolio-150x78.png 150w, https:\/\/www.tejwin.com\/wp-content\/uploads\/Maximum-Drawdown-Chart-of-Monthly-Frequency-Investment-Portfolio-768x402.png 768w\" sizes=\"(max-width: 862px) 100vw, 862px\" \/><figcaption class=\"wp-element-caption\">Figure4.5 Maximum Drawdown Chart of Monthly Frequency Investment Portfolio. Data Period: 2016\/1-2023\/12<\/figcaption><\/figure>\n\n\n\n<p>In summary, the analysis results show that when using weekly change in retail investors shareholding ratio as a factor to construct investment portfolios, and considering transaction fees, liquidity, as well as trading risk restrictions, weekly frequency investment portfolio underperforms due to the high turnover rate. On the other hand, <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">the performance of the monthly frequency investment portfolio is comparable to the market index<\/mark>. Further analysis indicates that <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">after experiencing two interest rate rising cycles, the cumulative returns of the investment portfolio continue to rise<\/mark>. However, it&#8217;s important to note that during interest rate hikes, the investment portfolio may experience a drawdown period lasting up to one and a half years, with a drawdown exceeding 25%.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>This study explores the relationship between retail investor trading behavior and stock expected returns based on nearly 8 years of listed stock data. Retail investor factors were constructed using changes in the number of shareholders, number of shares held, and shareholding ratio in the 1-5 lots category. We further use factor analysis, simulation backtesting, and performance analysis to examine the result. Based on the comprehensive analysis, the following three conclusions are drawn:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Retail investor factors have a significant effect on predicting stock expected returns<\/strong>, showing a clear negative correlation, which is consistent with the characteristics of retail investors with limited capital and lagging information. Among these factors, <strong><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">the retail investor factor of weekly change in shareholding ratio shows the most significant predictive effect<\/mark><\/strong>.&nbsp;<\/li>\n\n\n\n<li>The retail investor factor of weekly change in shareholding ratio not only shows a clear monotonic decreasing relationship between group ranking and average portfolio returns but also exhibits a significantly negative correlation between the overall factor and future stock returns. However, the Bottom Quantile&#8217;s investment portfolio has an annualized turnover rate of up to 28 times.It should be noted that <strong>the high turnover may lead to higher transaction fees, which may in turn erode investment returns<\/strong>.<\/li>\n\n\n\n<li>Using retail investor factors to construct investment portfolios, considering trading costs, liquidity, and trading risk restrictions, <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>the performance of monthly frequency investment portfolios is better than that of weekly frequency investment portfolios<\/strong>.<\/mark> Besides, it outperformed the market during the backtesting period, and the performance of investment portfolios continued to reach new highs. However, it is worth noting that during interest rate hikes, the maximum drawdown period of monthly frequency investment portfolios may last up to one and a half years, and the drawdown may exceed 25%.<\/li>\n<\/ul>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button has-custom-width wp-block-button__width-100 has-custom-font-size\" style=\"font-size:22px\"><a class=\"wp-block-button__link has-background wp-element-button\" href=\"https:\/\/www.tejwin.com\/en\/databank-solution\/market-data\/\" style=\"border-radius:16px;background:linear-gradient(135deg,rgb(160,209,216) 0%,rgb(51,145,181) 50%,rgb(50,95,191) 100%)\"><strong>Access to Comprehensive Retail Investors Data<\/strong><br><strong>Start Building Portfolios That Outperforms the Market Today!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<div style=\"height:22px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"has-text-align-center\" style=\"font-size:32px\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><strong><em>&#8220;Taiwan stock market data, TEJ collect it all.&#8221;<\/em><\/strong><\/mark><\/p>\n\n\n\n<p>The characteristics of the Taiwan stock market differ from those of other European and American markets, and <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-black-color\"><span style=\"text-decoration: underline;\" class=\"ek-underline\">the dynamics of retail investors are worth noting<\/span><\/mark>. Especially in the first quarter of 2024, with the <strong><mark style=\"background-color:rgba(0, 0, 0, 0);color:#c05d5d\" class=\"has-inline-color\">Taiwan Stock Exchange reaching a new high of 20,000 points<\/mark><\/strong> due to the rise in TSMC&#8217;s stock price, global institutional investors are paying more attention to the performance of the Taiwan stock market.&nbsp;<\/p>\n\n\n\n<p><strong><mark style=\"background-color:rgba(0, 0, 0, 0);color:#0978b8\" class=\"has-inline-color\">Taiwan Economical Journal (TEJ)<\/mark><\/strong>, a financial database established in Taiwan for over 30 years, serves local financial institutions and academic institutions, and has long-term cooperation with internationally renowned data providers, providing high-quality financial data for five financial markets in Asia.&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><mark style=\"background-color:#ebc766\" class=\"has-inline-color has-black-color\">Complete Coverage<\/mark><\/strong>: Includes all listed companies on stock markets in Taiwan, China, Hong Kong, Japan, Korea, etc.&nbsp;<\/li>\n\n\n\n<li><strong><mark style=\"background-color:#ebc766\" class=\"has-inline-color\">Comprehensive Analysis of Enterprises<\/mark><\/strong>: Operational aspects, financial aspects, securities market performance, ESG sustainability, etc.&nbsp;<\/li>\n\n\n\n<li><strong><mark style=\"background-color:#ebc766\" class=\"has-inline-color\">High-Quality Database<\/mark><\/strong>: TEJ data is cleaned, checked, enhanced, and integrated to ensure it meets the information needs of financial and market analysis.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>With TEJ&#8217;s assistance, you can access relevant information about major stock markets in Asia, such as securities market, financials data, enterprise operations, board of directors, sustainability data, etc., providing investors with timely and high-quality content. Additionally, TEJ offers advisory services to help solve problems in theoretical practice and financial management!<\/p>\n\n\n\n<div class=\"wp-block-buttons is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-a89b3969 wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button has-custom-width wp-block-button__width-100 has-custom-font-size\" style=\"font-size:21px\"><a class=\"wp-block-button__link has-background has-text-align-center wp-element-button\" href=\"https:\/\/www.tejwin.com\/en\/contact\/\" style=\"border-radius:16px;background:linear-gradient(135deg,rgb(160,209,216) 0%,rgb(51,145,181) 50%,rgb(50,95,191) 100%)\"><strong>Want to Learn More About Our Databases?<br>Contact Us and Get the Free Trial!<\/strong><\/a><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>In the Taiwan stock market, retail investors account for the highest proportion and have the highest trading volume in the market. This article uses factor analysis to delve into the relationship between retail investor trading behavior and stock expected returns.<\/p>\n","protected":false},"featured_media":17064,"template":"","tags":[2988,2638,3007],"insight-category":[690],"class_list":["post-21614","insight","type-insight","status-publish","has-post-thumbnail","hentry","tag-quantitative-analysis","tag-taiwan-stock","tag-tejapi-data-analysis","insight-category-data-analysis"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/insight\/21614","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/insight"}],"about":[{"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/types\/insight"}],"version-history":[{"count":45,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/insight\/21614\/revisions"}],"predecessor-version":[{"id":26481,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/insight\/21614\/revisions\/26481"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/media\/17064"}],"wp:attachment":[{"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/media?parent=21614"}],"wp:term":[{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/tags?post=21614"},{"taxonomy":"insight-category","embeddable":true,"href":"https:\/\/www.tejwin.com\/en\/wp-json\/wp\/v2\/insight-category?post=21614"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}