The stock market meltdown provided a special opportunity for the study’s authors to explore which cross section of investors contributing most to selling pressure. The paper joins an expanding pool of research assessing the effect of wealth on investment decisions, and how different groups judge risk.
“The older view of the stock market is that prices move in response to news that arrives -- it’s not usually thought of as a large collection of individuals trading on slightly different information and having different reactions to new events,” Reck said. “Documenting this kind of heterogeneity will allow us to paint a fuller picture of how stock markets actually work.”
The paper, titled “Who Sold During the Crash of 2008-9? Evidence from Tax-Return Data on Daily Sales of Stock,” was co-authored by Reck, his fellow doctoral candidate Bryan Stuart, Michigan economics professors Stefan Nagel and Joel Slemrod, Ohio State accounting professor Jeffrey Hoopes and IRS research analyst Patrick Langtieg.
While the IRS data provided new means for assessing who unloaded equities during the crisis, it doesn’t give a complete picture, the authors note. Absent from the numbers are share purchases, which would provide net selling data. It’s also possible that people increase levels of selling from non-taxable retirement accounts during crises.
So were people who sold during the 2008 rout guilty of a behavioral bias involving market timing or just good traders? Both could be true. Someone selling early in the plunge avoided at least part of the biggest equity wipeout since 1937, which saw the S&P 500 plummet 57 percent.
At the same time, holding stocks since the 2007 peak hasn’t been a money-losing proposition. The S&P 500 has posted annualized return of almost 6 percent since the high point in October 2007.
“At this point it’s too early to tell whether market timing has been successful,” Reck said. “We have the data -- we know what they sold and we can tie it to historical stock prices. But right now, we’re not conclusive one way or the other.”