Essays on Investor and Broker Behavior in Equity Markets

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School of Business | Doctoral thesis (article-based)
Degree programme
20 + app. 120
Aalto University publication series DOCTORAL DISSERTATIONS, 8/2021
This doctoral dissertation studies the behavior of investors and brokers on equity markets. It consists of an introductory chapter and three self-contained essays. The first essay, joint with Matti Suominen, studies the impact of unemployment and its growth on the expected stock market returns both theoretically and empirically using the U.S. data. Our theoretical model predicts that the expected equity return increases with unemployment and unemployment growth, and that the impacts of unemployment and its growth on the expected equity returns reinforce each other. Our empirical evidence supports these predictions, even when alternative measures of unemployment and its growth are used. Additionally, we find that FED tends to smooth the high stock market returns caused by high unemployment and high unemployment growth using various monetary policies, but these FED actions do not drive the stock return predictability of unemployment. The second essay investigates the impact of trader anonymity on unsophisticated liquidity using a novel measure – duration-until-next-unsophisticated-order (DUNUO). I analyze DUNUO following anonymous and non-anonymous trades on Nasdaq Helsinki, where a voluntary post-trade anonymity model was launched. I find that DUNUO is statistically and economically longer after anonymous trades than after non-anonymous trades, suggesting a negative impact of anonymity on unsophisticated liquidity. This essay also shows that the negative impact of anonymity on unsophisticated liquidity decreases with a declining level of information asymmetry. This relationship is robust to alternative measures of unsophisticated liquidity. The third essay, utilizing the same voluntary anonymity model, examines the determinants of brokers' choice for anonymity. This essay shows that, in a market where brokers can choose to reveal or conceal identities in the real-time trade feed on a monthly basis, local brokers and brokers who provide online discount brokerages to retail investors are more reluctant to select anonymity. This essay also provides evidence that the brokers' trading patterns can explain their anonymity choices.
Supervising professor
Suominen, Matti, Prof., Aalto University, Department of Finance, Finland
Thesis advisor
Lof, Matthijs, Dr., Aalto University, Finland
Torstila, Sami, Dr., Aalto University, Finland
unemployment, equity returns, trader anonymity, liquidity, unsophisticated investor, broker
Other note
  • [Publication 1]: Yijie Li and Matti Suominen: Equity Returns, Unemployment, and Monetary Policy
  • [Publication 2]: Yijie Li: The Impact of Anonymity on Unsophisticated Liquidity and Changing Information Asymmetry
  • [Publication 3]: Yijie Li: Who Chooses to Trade Anonymously? Trading Patterns, Costs, and Market Reaction