Do individual investors, or those with little information about a company's prospects, affect stock prices? Over the past decade, this question has been at the forefront of research and debate in financial economics. On one side are the traditional "Chicago School" economists who believe that those with no valuable information have little impact on stock prices. On the other side are "Behaviorists" who conjecture that individuals might affect asset prices. Solid evidence to support the behaviorists' conjectures has been lacking.

Mark S. Seasholes (HKUST) and two colleagues tackle the question by looking at trading in Taiwan. Specifically, they study trades made through local margin accounts, which offers a number of advantages: 99.3% of trades are generated by individual investors; these trades constitute approximate 40% of the market's total trading volume; the average individual in Taiwan underperforms the market, indicating a lack of valuable information; and about 90% of trades can be classified as "aggressive" indicating the use of marketable limit orders.

The authors do a weekly sort of Taiwanese stocks into quintiles based on the magnitude of individuals' net trades (buys minus sells). Stocks bought by individuals are shown to experience a pattern of contemporaneous price increases followed by decreases. Stocks that are sold experience initial price decreases followed by price increases. The pattern of price movements - especially the mean reversion in prices - is consistent with individuals having a large, but temporary, effect on prices. The authors measure a 2.42% contemporaneous price impact followed by a 10-week reversion period.

The magnitude and duration of the price mean reversion are much larger than previously measured in stock markets. The authors explain the mean reversion through an economic equilibrium model. The model and the empirical results are consistent with risk averse liquidity providers requiring compensation for trading with impatient investors (individuals). The compensation comes from the price mean reversion - liquidity providers buy low and sell high.

The authors present a multi-asset economic model of liquidity provision. The model predicts price mean reversion. The model also predicts that liquidity provider hedging needs lead to "cross-stock price pressure". This means individual buying or selling in one stock can impact the prices of other, related stocks (even if these other stocks do not experience buying or selling). The Taiwanese data allow Seasholes and his co-authors to find evidence of this cross-stock price pressure.

Finally, the authors present evidence that individual trades lead to excess volatility of stock returns.