Research

Abstract: We examine the effects of stock market access, and in particular trading hours, on retail investment performance. Using discontinuities around time zone borders, we find that plausibly exogenous decreases in waking trading hours are associated with meaningful increases in retail investors’ capital gains, as reported on tax returns for the U.S. population. Our results indicate that limiting trading hours curbs active retail trading, leading to improvements in portfolio performance. Our findings identify one negative effect of decreasing barriers to entry for retail investors in trading markets.

Figure Highlight: Density plot of EDGAR downloads geomapped by timezone. Information acquisition shifts with local social time, not just market hours (noted by red vertical lines).

Abstract: Tax wash sale rules prohibit the recognition of capital losses when substantially identical securities are sold and immediately repurchased within short windows. This study examines whether institutional investors use ETFs to circumvent wash sale rules. Consistent with tax-motivated demand for ETFs, incumbent ETFs both create more shares and experience more trading volume upon the introduction of nearly identical ETFs, particularly when recent returns are negative. We show tax-sensitive institutions’ investment in highly correlated ETFs has proliferated in recent years, exceeding a quarter of their AUM. Furthermore, tax-sensitive institutions holding more ETFs are significantly more likely to engage in swapping nearly identical ETFs. This swapping behavior has become widespread, with tax-sensitive institutional investors swapping $417 billion of nearly identical ETFs since 2001. We estimate that tax-sensitive institutions realized more than $84 billion dollars in losses in highly correlated ETFs associated with the swapping activity since 2001.

Figure Highlight: Proportion of institutional trading volume devoted to swapping between Highly Correlated (>.99) ETFs. Tax Sensitive institutions engage in significantly more swapping as a percent of their trading activity.