Received: 11 January 2018 Revised: 10 August 2018 Accepted: 9 September 2018

DOI: 10.1002/ijfe.1659

RESEARCH ARTICLE

Investor trading behaviour and stock price crash risk

Liyun Zhou1 | Jialiang Huang2

1
College of Economics and Management,
South China Agricultural University,
Abstract
Guangzhou, China This paper sheds new light on the relation between investor trading behaviour
2
School of Management, Guangzhou and crash risk to examine how investors react to stocks with lottery features in
University, Guangzhou, China Chinese Stock Market. We find that investor trading behaviour has a greater
Correspondence impact on stocks with higher crash risk, which implies that investors overreact
Jialiang Huang, School of Management, to stocks with higher stock price crash risk. Furthermore, investor trading
Guangzhou University, Guangzhou
behaviour has strongest effects on stocks with highest crash risk and highest idi-
510006, China.
Email: mrwong1989@foxmail.com osyncratic risk and has weakest effects on stocks with lowest crash risk and low-
est idiosyncratic risk, which indicates that investors gamble lottery‐like stocks
Funding information
Guangdong Planning office of Philosophy
with high crash risk and high idiosyncratic risk. Collectively, these results sup-
and Social Science, Grant/Award Num- port a role for investor trading behaviour in the formation of stock returns.
bers: GD17XLJ04 and GD17XGL14;
Department of Education of Guangdong KEYWORDS
Province, Grant/Award Number: idiosyncratic risk, investor trading behaviour, lottery‐like stocks, stock price crash risk
2017WQNCX014; Natural Science Foun-
dation of Guangdong Province, Grant/
Award Number: 2018A030310218; Natural
Science Foundation of China, Grant/
Award Number: (71803051); the social
science foundation of Chinese Education
Ministry, Grant/Award Number:
(18YJCZH055)

JEL Classification: G1; G10; G12

1 | INTRODUCTION ample empirical evidence demonstrates the existence and

It is well established that stock price crash risk is an impor-
tant issue in financial markets. As one of the most studied
risks, stock price crash risk, defined as the conditional
skewness of return distribution, captures asymmetry in
risk. The literature on stock price crash risk has been
growing since Chen, Hong, and Stein (2001). Theoretically
and empirically, much research focuses on the importance
of stock price crash risk from different perspectives, such
as different of opinions (Hong & Stein, 2003), corporate
tax avoidance (J. B. Kim, Li, & Zhang, 2011), corporate
social responsibility (Y. Kim, Li, & Li, 2014), institutional
investors (An & Zhang, 2013), short interest (Callen &
Fang, 2015), investor sentiment (Yin & Tian, 2017), and
employee welfare (Ben‐Nasr & Ghouma, 2018). Overall,
importance of stock price crash risk.
Blume, MacKinlay, and Terker (1989) investigate the
investor trading behaviour (order imbalance) around the
October 1987 crash. In fact, ample empirical evidence also
investigates how investor trading behaviour affects stock
prices, such as investor activities and return comovements
(Barber, Odean, & Zhu, 2009; Hvidkjaer, 2006, 2008;
Kumar & Lee, 2006; Malmendier & Shanthikumar, 2007;
Qian, 2014; Yang & Zhou, 2015), investor activities, and
risk (Chen et al., 2014; Chordia, Roll, & Subrahmanyam,
2002; Han & Kumar, 2013; Kumar & Lee, 2006).
Following these researches and investor trading
behaviour effect around stock price crash, people have
shown interest in investigating whether the so‐called
speculative activity impacts the level of stock prices and

Int J Fin Econ. 2018;1–14. wileyonlinelibrary.com/journal/ijfe © 2018 John Wiley & Sons, Ltd. 1
2 ZHOU AND HUANG
crash risk. Investors who adopt the same investment
strategy as the other investors will exacerbate momentum
crash risk with no fundamental anchor (Stein, 2009; Yan,
2013). However, a direct relationship among crash risk,
investor trading behaviour and stock prices has not yet
been studied. Therefore, in this paper, we undertake an
empirical investigation to shed new light on the relation
between investor trading behaviour and stock price crash
risk to understand how investors react to stocks with high
stock price crash risk. We find that investor trading
behaviour plays an important role on skewness‐sorted
stock portfolios without or with control variables, and
investor trading behaviour has a greater impact on stocks
with higher crash risk. Given the lottery‐like stock with
high volatility, we can find that investors gamble lot-
tery‐like stocks with higher stock price crash risk.
Given the stocks with lottery features have high volatil-
ity and high skewness in Kumar (2009), idiosyncratic risk
and stock price crash risk will influence each other, and
their interaction will impact the investor trading behav-
iour effects on stock prices. On the one hand, some related
literatures aim to access how idiosyncratic risk affects
stock price crash risk. For example, Boyer, Mitton, and
Vorkink (2010) demonstrate that skewness helps explain
the phenomenon that stocks with high idiosyncratic vola-
tility have low expected returns. Fu (2009) uncovers that
the negative relation between average return and the
lagged idiosyncratic volatility greatly reduces after control-
ling for expected skewness. On the other hand, extant
literature uncovers that retail investor trading behaviour
plays a stronger role on high idiosyncratic risk stocks,
and further reveals that the negative retail trading propor-
tion premium is stronger among stock with high idiosyn-
cratic risk and high idiosyncratic skewness (Han &
Kumar, 2013). However, rare paper investigates whether
the relation between investor trading behaviour and stock
price crash risk is affected by stock‐level idiosyncratic risk.
Combining these two views and given the significant
impact of investor trading behaviour on skewness‐sorted
stock portfolios, we further shed new lights on answering
whether the relation between investor trading behaviour
and stock price crash risk is affected by stock‐level idiosyn-
cratic risk. We first find that the negative stock price crash
risk effect (the positive stock price crash risk effect) among
stocks with high idiosyncratic risk is stronger than the neg-
ative stock price crash risk effect (the positive stock price
crash risk effect) among stocks with low idiosyncratic risk.
And we further uncover that the idiosyncratic risk effect is
positively related to investor trading behaviour, and the
stock price crash risk effect is positively related to investor
trading behaviour. Therefore, our results confirm that
investor trading behaviour has the strongest effect on
stocks with highest crash risk and highest idiosyncratic
risk and has the weakest effect on stocks with lowest crash
risk and lowest idiosyncratic risk. Overall, the stronger
investor trading behaviour effect reveals that investors
gamble stocks with stronger lottery features.
In addition, we conduct several robustness tests to
ascertain robustness of our results and confirm that investor
trading behaviour is priced in stock prices, and investors
gamble or prefer for stocks with higher idiosyncratic risk
and stock price crash risk. Furthermore, we try to study
whether the existence of investor trading behaviour is
unique to the research sample or whether these results are
general in the stock market rather than being evert specific.
Therefore, we subsequently proceed several further tests to
verify our results in subsamples and subperiods and con-
firm our main results. Collectively, investor trading behav-
iour has a greater impact on stocks with higher crash risk,
and investors gamble stocks with stronger lottery features.
Our study makes several contributions. First, our study
adds to the growing literature on investor trading behav-
iour and its economic consequence. As discussed earlier,
much work in this area has focused on the impact of inves-
tor trading behaviour on return comovements, to a lesser
extent, stock risk, such as idiosyncratic risk (Han &
Kumar, 2013), liquidity risk (Chordia et al., 2002; Kumar
& Lee, 2006). We focus on the unique role of investor trad-
ing behaviour in stock price crash risk. Our results thus
broaden our understanding of the implications of investor
trading behaviour on stock prices. Second, our study
extends prior research that attempts to explain the relation
between investor trading behaviour and idiosyncratic risk
(e.g., Han & Kumar, 2013). Specifically, we further investi-
gate whether the relation between investor trading behav-
iour and stock price crash risk is affected by stock‐level
idiosyncratic risk. We extend prior studies by identifying
the investor trading behaviour effects on idiosyncratic risk
and crash risk to uncover that investors gamble lottery‐like
stocks with high idiosyncratic risk and high crash risk,
which is useful to firms and shareholders who want to
manage risk and make investment decisions.
This paper is organized as follows. We discuss the
sample, variable measurements, and summary statistics
in Section 2. Section 3 presents our empirical results,
and Section 4 shows our robustness tests. Section 5 con-
ducts some further tests to confirm our main results.
Finally, we conclude in Section 6.
2 | DATA
Considering the Chinese Split Share Structure Reform1 in
2005 and the representativeness of Shanghai Stock
Exchange, we select the 937 common stocks in Shanghai
Stock Exchange from Jan 2005 to Dec 2015, covering a
ZHOU AND HUANG
total of 132 months. We obtain monthly stock price,
return, and trades from the Wind database. We use
RESSET database to obtain the monthly Fama and
French three factor of Chinese stock market and the
monthly momentum factor of Chinese stock market.
And we collect the daily stock prices and returns from
the Wind database. Combing these data, we further use
the following ways to measure investor trading behav-
iour, stock price crash risk, and idiosyncratic risk.
2.1 | Investor trading behaviour
Theoretically and empirically, much research focuses on the
importance of investor trading behaviour on stock returns,
such as the relation between investor trading behaviour
and return comovements (Kumar & Lee, 2006; Kumar,
Page, & Spalt, 2013; Yang & Zhou, 2015), investor trading
behaviour, and risk (Han & Kumar, 2013). Here, we classify
trades as buyers or sellers according to the Lee and Ready
(1991) algorithm: If a trade is executed at a price above
(below) the quote midpoint, it is classified as a buy (sell).
To compute the monthly portfolio BSIp,t, we first define the
investor trading behaviour (BSIi,t) for stock i of month t as
BV i;t − SV i;t
BSI i;t ¼ : (1)
BV i;t þ SV i;t
Here, BVi,t is the buyer‐initiated volume for stock i on
month t and SVi,t is the seller‐initiated volume for stock i
on month t.
Next, we generate a measure of portfolio BSI by calcu-
lating an equal‐weighted average of individual stock BSIs.
That is, we solve
1 N
BSI p;t ¼ ∑ BSI i;t : (2)
N i¼1
Here, N is the number of stocks in portfolio p. The
monthly portfolio‐level BSI provides a measure of the
number of investor buys minus sells for each stock, where
each stock is weighted equally in the portfolio.
2.2 | Stock price crash risk
Stock price crash risk, defined as the conditional skewness
of return distribution, is an important issue on asset pricing
that measures the asymmetry in risk, especially the down-
3
Chan, 2014). For any stock i over any day d, we employ
the method of Chen et al. (2001) to measure the skewness
to capture the crash risk of stock i. Here, we first calculate
the equal‐weighted average return of the 937 stocks as the
market return at day d, which defines as Rm,d. Therefore, to
compute the stock price crash risk, we first measure the
residual return (Wi,d) of the following equation:
Ri;d ¼ a þ b1 Rm;d−2 þ b2 Rm;d−1 þ b3 Rm;d þ b4 Rm;dþ1 (3)
þb5 Rm;dþ2 þ εi;d :
Here, Ri,d is the return of stock i in day t, Rm,d − 2 is the
market return in day d − 2, Rm, d − 1 is the market return in
day d − 1, Rd,t is the market return in day d, Rm,d + 1 is the
market return in day d + 1, Rm,d + 2 is the market return
in day d + 2, and εi,d is the residual return. Therefore, the
residual return of stock i in day t is Wi,d = ln (1 + εi,d).
Therefore, the yearly skewness of stock prices as a measure
of stock price crash risk can be defined as:
 
− nðn−1Þ3=2 ∑ W 3i;d
¼
NCSKEW i;t  3=2 : (4)
ðn − 1Þðn − 2Þ ∑W 2i;d
Here, Wi,d represents the residual daily returns of
stock i during day d and n is the number of observations
on daily returns during the year. Therefore, we can obtain
the yearly skewness of stock prices to capture the stock
price crash risk during that year.
2.3 | Idiosyncratic risk
For various reasons, investors may be not hold perfectly
diversified portfolios; therefore, idiosyncratic risk plays
an important role on asset pricing (Ang, Hodrick, Xing,
& Zhang, 2006; Fu, 2009; Stambaugh, Yu, & Yuan,
2015). In this section, we use the EGARCH (p,q) model
in Fu (2009) to estimate the idiosyncratic risk of stock i
in month t. The explicit functional forms are as follows:
Ri;t − Rf ;t ¼ α þ βi Rmrf t þ si Smbt þ hi Hmlt þ εi;t ;
  (5)
εi;t ∼ N 0; σ 2i;t ;
p
lnσ 2i;t ¼ ai þ ∑ bi;t lnσ 2i;t−1
i¼1
     
side risk. Specifically, Chen et al. (2001) calculate the skew- q
εi;t−k  εi;t−k 
þ ∑ ci;k θ þ γ   − ð2=π Þ1=2 : (6)
ness of stock prices to measure the stock price crash risk.
Furthermore, a large body of literature demonstrates the
importance of stock price crash risk (Hong & Stein, 2003;
Hutton, Marcus, & Tehranian, 2009; Jin & Myers, 2006; J.
B. Kim et al., 2011; J. B. Kim & Zhang, 2013; Li, Wang, &
Wang, 2017; Xu, Jiang, Chan, & Yi, 2013; Xu, Li, Yuan, &
k¼1 σ i;t−k σ i;t−k 
In this section, we use EGARCH (1,1) model to measure
the idiosyncratic risk of stock i in month t. The estimated
conditional idiosyncratic volatility, denoted by IVOL,
will be used to estimate the monthly idiosyncratic risk of
4 ZHOU AND HUANG

stock i, so we can examine the individual stock level
idiosyncratic risk or sort directly on idiosyncratic risk.
2.4 | Summary statistic
Table 1 reports the summary statistics for the main vari-
ables used in the empirical analysis. All variables are
defined in the previous sections.
Table 1 reports the summary statistics for our sample.
The mean of individual stock returns Ri,t is 0.0072, and its
standard deviation is 0.1611. The mean of risk free rate
R f ,t is 0.0029, and its standard deviation is 0.0012. The
mean and standard deviation of market return in excess
of risk‐free rate (Rmrft) are 0.0132 and 0.0917, respec-
tively. The mean and standard deviation of Smbt are
0.0110 and 0.0456, respectively. The mean and standard
deviation of Hmlt are −0.0019 and 0.0361, respectively.
The mean and standard deviation of Mont are −0.0173
and 0.0772, respectively. The mean and standard
deviation of individual stock investor trading behaviour
(BSIi,t) are 0.0174 and 0.1963, respectively. The mean
and standard deviation of individual stock idiosyncratic
risk (IVOLi,t) are 0.0155 and 0.1389, respectively. The
mean and standard deviation of individual stock crash
risk (NCSKEWi,t) are −1.4182 and 7.8266, respectively.
3 | EMPIRICAL R ESULTS
3.1 | Investor trading behaviour effect on
stocks with crash risk
In this section, we begin with a simple portfolio test. We
rank stocks based on their skewness (stock price crash
TABLE 1 Summary statistic
risk) in deciles in year t, and portfolio membership does
not change during the course of the year. Portfolio
“H − NCSKEW” consists of stock with the highest skew-
ness, whereas portfolio “L − NCSKEW” consists of stock
with the lowest skewness, and portfolio “HN − LN” indi-
cates the skewness long‐short portfolio. Next, for each
portfolio, we compute the monthly portfolio return as
an equal‐weighted average of all stocks in the portfolio,
and we construct a monthly portfolio return time series.
Finally, we estimate the time‐series factor model for each
portfolio in the following regressions.
Rp;t − Rf ;t ¼ α þ βBSI BSI p;t þ εp;t ; (7)
Rp;t − Rf ;t ¼ α þ βRmrf Rmrf t þ βSmb Smbt þ βHml Hmlt
þ βBSI BSI p;t þ εp;t : (8)
Here, Rp,t is the current return of stock portfolio p at
month t, R f ,t is the risk‐free rate of return at month t, Rmrft
is the market return in excess of risk‐free rate at month t,
Smbt is the difference between the value‐weighted return
of a portfolio of small stocks and the value‐weighted
return of a portfolio of large stocks at month t, Hmlt is
the difference between the value‐weighted return of a
portfolio of high B/M stocks and the value‐weighted
return of a portfolio of low B/M stocks at month t, BSIp,t
is the investor trading behaviour of stock portfolio p at
month t, and εp,t is the residual return on the portfolio.
Table 2 presents the regression results to uncover that
the cross‐sectional effect of skewness‐sorted stock returns
is conditional on investor trading behaviour. In detail,
Panel A reports the investor trading behaviour effect in
skewness‐sorted portfolios. Specifically, we observe that

Variables Mean Std.Dev Min Mediam Max Skewness Kurtosis Obs

Ri,t 0.0072 0.1611 −1.4393 0.0104 2.4290 −0.2451 8.0324 111,785

R f ,t 0.0029 0.0012 0.0009 0.0031 0.0051 −0.1512 1.8143 132
BSIi,t 0.0174 0.1963 −0.3333 0.0341 0.3334 −0.1157 1.6146 111,785
NCSKEWi,t −1.4182 7.8266 −13.787 −3.3622 13.7870 0.4384 2.1444 9,395
IVOLi,t 0.0155 0.1389 0.0000 0.0099 32.6824 167.4752 33970.21 111,785
Rmrft 0.0132 0.0917 −0.2728 0.0143 0.2899 −0.0845 3.7389 132
Smbt 0.0110 0.0456 −0.1637 0.0140 0.1470 −0.4673 4.4829 132
Hmlt −0.0019 0.0361 −0.1638 −0.0054 0.1536 −0.0697 7.5149 132
Mont −0.0173 0.0772 −0.3239 −0.0066 0.1566 −1.4121 6.3529 132

Note. This table reports the summary statistics of the sample used in the regression estimations. Ri,t is the current return of stock i at month t, R f ,t is the risk‐free rate
of return at month t, Rmrft is the market return in excess of risk‐free rate at month t, Smbt is the difference between the value‐weighted return of a portfolio of small
stocks and the value‐weighted return of a portfolio of large stocks at month t, Hmlt is the difference between the value‐weighted return of a portfolio of high B/M
stocks and the value‐weighted return of a portfolio of low B/M stocks at month t, Mont is the difference between the value‐weighted return of a portfolio of stocks
with high returns during months t − 12 to t − 2 and the value‐weighted return of a portfolio of stocks with high returns during months t − 12 to t − 2, BSIi,t is the
investor trading behaviour of stock i at month t, NCSKEWi,t is the stock price crash risk of stock i at year t, and IVOLi,t is the idiosyncratic risk of stock i at month t.
The sample period ranges from Jan 2005 to Dec 2015, covering a total of 132 months, and the sample includes the 937 common stocks in Shanghai Stock Exchange.
ZHOU AND HUANG 5

TABLE 2 The investor trading behaviour effects in subsamples of high versus low crash risk

H − NCSKEW Next 25% Next 25% L − NCSKEW HN − LN

Panel A: Excluding Fama–French three factors as control variables

BSIp, t 0.7625*** (27.29) 0.6965*** (32.32) 0.7140*** (33.76) 0.8145*** (27.49) 0.5966*** (12.04)
Intercept −0.0174*** (−4.34) −0.0108*** (−3.78) −0.0086*** (−3.06) 0.0007 (0.16) −0.0355*** (−7.16)
Adj. R2 0.8502 0.8885 0.8968 0.8521 0.5234
Panel B: Including Fama–French three factors as control variables
Rmrft 0.6329*** (9.78) 0.3878*** (8.11) 0.4185*** (8.68) 0.8776*** (11.81) −0.1212*** (−3.18)
Smbt 0.5760*** (6.37) 0.4071*** (5.29) 0.3216*** (4.72) 0.4439*** (5.16) 0.1347 (1.55)
Hmlt 0.0136 (0.14) 0.0555 (0.72) −0.0352 (−0.48) −0.2693*** (−2.63) 0.1200 (1.04)
BSIp, t 0.3523*** (7.74) 0.4205*** (11.07) 0.4264*** (11.44) 0.2790*** (5.56) 0.5718*** (11.54)
Intercept −0.0401*** (−10.63) −0.0187*** (−7.32) −0.0102*** (−4.49) 0.0115*** (3.47) −0.0369*** (−7.39)
2
Adj. R 0.9154 0.9263 0.9345 0.9287 0.5517
Note. This table reports the factor model estimates for the stocks of Shanghai Stock Exchange in subsamples of high versus low crash risk. Panel A reports the
investor trading behaviour effects on crash‐risk‐sorted portfolios without the Fama–French three factors as control variables. Panel B reports the investor trad-
ing behaviour effects on crash‐risk‐sorted portfolios with the Fama–French three factors as control variables. On month t, all A share stocks in Shanghai Stock
Exchange are sorted into four portfolios by preranking stock price crash risk. The t statistics of the coefficient estimates are reported in parentheses. The sample
period ranges from Jan 2005 to Dec 2015, covering a total of 132 months, and the sample includes the 937 common stocks in Shanghai Stock Exchange.
*Significance at the 10% level. **significance at the 5% level. ***Significance at the 1% level.

the investor trading behaviour effect is positive in all skew-
ness‐sorted portfolios where the coefficient estimates of
investor trading behaviour are 0.07625 (t statistic = 27.29),
0.6965 (t statistic = 32.32), 0.7140 (t statistic = 33.76), and
0.8145(t statistic = 27.49) from “H − NCSKEW” portfolio
to “L − NCSKEW” portfolio; furthermore, the investor
trading behaviour effect is greater in “H − NCSKEW”
portfolios than “L − NCSKEW” portfolios with a t statistic
of 12.04. When control variables are included in the cross‐
sectional regression, the investor trading behaviour is still
strongly positively related to returns in skewness‐sorted
portfolios. Therefore, our baseline results show that stocks
with high stock price crash risk are more affected by inves-
tor trading behaviour than stocks with low stock price
crash risk. This occurs because investors may be willing
to undertake large amount of short‐term risk (Han &
Kumar, 2013), which is consistent with some investors'
desire to gamble or preference for stocks with strong lottery
features (Barberis & Huang, 2008; Shefrin & Statman,
2000). Overall, our baseline results show that investor trad-
ing behaviour plays an important role on skewness‐sorted
stock portfolios without or with control variables, and
investor trading behaviour has a greater impact on stocks
with higher crash risk.
3.2 | Investor trading behaviour effect on
stocks with crash risk and idiosyncratic
risk
The results in the previous section shows the positive and
significant relationship between investor trading
behaviour and stock excess returns, and the greater
impact of investor trading behaviour in stocks with stron-
ger lottery features. However, Kumar (2009) shows that
investors with a gambling mindset find stock with high
volatility, high skewness, and low prices more attractive,
and Han and Kumar (2013) further investigate the roles
of speculative retail trading on stocks with high idiosyn-
cratic volatility and high idiosyncratic skewness. In this
section, we further try to use idiosyncratic volatility and
negative skewness to capture stocks with idiosyncratic
risk and stock price crash risk; therefore, we can further
capture stocks with stronger lottery features. Specifically,
we use the EGARCH (p,q) model in Fu (2009) to estimate
the idiosyncratic risk of stock i in month t as a measure of
arbitrage cost, and we use the method of Chen et al.
(2001) to calculate the skewness of stock prices to mea-
sure the stock price crash risk. Each month, portfolios
are constructed by first sorting on individual stock idio-
syncratic risk, forming four categories, and then sorting
independently by the crash risk measure, forming four
categories. We next construct 16 portfolios defined by
the intersections of this 4◊4 sort, and we equal‐weighted
the stocks' returns when computing portfolio returns.
Panel A of Table 3 presents the time‐series averages of
the monthly equal‐weighted returns for double‐sorted
portfolios by idiosyncratic risk and crash risk. Note that
the average returns across Panel A of Table 3 illustrate
that the average monthly returns decrease with stock
price crash risk and idiosyncratic risk. Panel B of
Table 3 shows the time‐series averages of the monthly
equal‐weighted investor trading behaviour for double‐
6 ZHOU AND HUANG

TABLE 3 The summary statistics of double‐sorted portfolios by idiosyncratic risk and crash risk

H − NCSKEW Next 25% Next 25% L − NCSKEW

Panel A: The expected return of stock returns

H − IVOL −0.0541 −0.0101 0.0097 0.0508
Next 25% −0.0247 −0.0052 0.0151 0.0511
Next 25% −0.0117 −0.0024 0.0170 0.0398
L − IVOL 0.0005 0.0006 0.0155 0.0247
Panel B: The average value of investor trading behaviour
H − IVOL −0.0359 −0.0009 0.0214 0.0541
Next 25% −0.0174 0.0060 0.0307 0.0596
Next 25% −0.0088 0.0089 0.0332 0.0537
L − IVOL 0.0030 0.0110 0.0299 0.0348
Panel C: The average number of stocks
H − IVOL 64 38 45 65
Next 25% 57 47 49 58
Next 25% 57 52 51 52
L − IVOL 60 56 48 47

Note. This table reports the summary statistics of sorting‐portfolio results by idiosyncratic risk and crash risk. Panel A reports the time‐series averages of
expected returns by sorting‐portfolio results. Panel B reports the time‐series averages of investor trading behaviour by sorting‐portfolio results. Panel C reports
the average number of stocks in different stock portfolios sorted by idiosyncratic risk and crash risk. On month t, all A share stocks in Shanghai Stock Exchange
are sorted into 16 portfolios by preranking both stock price crash risk and idiosyncratic risk. We average each characteristic for each portfolio every month and
then report the time‐series average of these estimates.

sorted portfolios by idiosyncratic risk and crash risk. Spe-
cifically, the average investor trading behaviour increases
with stock price crash risk and idiosyncratic risk, which
consists with Kumar (2009) and reveals that investors
with a gambling mindset find stock with high volatility,
high skewness. Panel C of Table 3 uncovers the average
number of stocks for double‐sorted portfolios by idiosyn-
cratic risk and crash risk. More generally, these results
support our hypotheses that investor trading behaviour
and stock returns have positive relation, so we will fur-
ther test the relationship between investor trading behav-
iour and stock returns for double‐sorting portfolios by
idiosyncratic risk and crash risk.
First, we try to investigate the time‐varying stock
price crash risk effects on IVOL‐sorted portfolios, and
we need to calculate the benchmark‐adjusted returns in
double‐sorted portfolios by idiosyncratic risk and crash
risk. Specifically, we estimate that the benchmark‐
adjusted returns are estimates of α in the following
regression:
Rp;t − Rf ;t ¼ α þ βRmrf Rmrf t þ βSmb Smbt þ βHml Hmlt
þ εp;t :
Here, Rp,t is the current return of stock portfolio p at
month t, R f ,t is the risk‐free rate of return at month t,
Rmrft is the market return in excess of risk‐free rate at
month t, Smbt is the difference between the value‐
weighted return of a portfolio of small stocks and the
value‐weighted return of a portfolio of large stocks at
month t, Hmlt is the difference between the value‐
weighted return of a portfolio of high B/M stocks and
the value‐weighted return of a portfolio of low B/M
stocks at month t, and εp,t is the residual return on the
portfolio.
Table 4 presents the results of the portfolio‐based
analysis of the stock price crash risk effect in different
individual stock idiosyncratic risk stock portfolios. We
find the benchmark‐adjusted returns for portfolios
formed by sorting stocks independently on idiosyncratic
risk and crash risk in Fama–French three factor model
decrease with stock price crash risk and individual stock
idiosyncratic risk. Specifically, the benchmark‐adjusted
returns of long‐short price crash risk stock portfolios are
−0.1015 (t statistic = −14.82), −0.0824 (t statis-
tic = −14.04), −0.0628 (t statistic = −11.53), and
−0.0449 (t statistic = −9.48) in different idiosyncratic risk
stocks. As a result, we can see that the negative IVOL
effect among the stocks with high stock price crash risk
(9) is stronger than the positive IVOL effects among the
stocks with low stock price crash risk, which is consistent
with Stambaugh et al. (2015). And the benchmark‐
adjusted returns of long‐short idiosyncratic risk stock
portfolios are −0.0493(t statistic = −8.33), −0.0126 (t
ZHOU AND HUANG 7

TABLE 4 The benchmark‐adjusted returns for portfolios formed by sorting stocks independently on idiosyncratic risk and crash risk in
Fama–French three factor model

H − NCSKEW Next 25% Next 25% L − NCSKEW HN − LN

H − IVOL −0.0844*** (−13.07) −0.0346*** (−7.72) −0.0137*** (−3.31) 0.0171*** (4.05) −0.1015*** (−14.82)
Next 25% −0.0575*** (−13.61) −0.0297*** (−7.70) −0.0091** (−2.53) 0.0249*** (6.27) −0.0824 (−14.04)
Next 25% −0.0458*** (−12.36) −0.0280*** (−8.31) −0.0097*** (−2.83) 0.0187*** (5.08) −0.0628*** (−11.53)
L − IVOL −0.0351*** (−12.21) −0.0226*** (−7.64) −0.0083*** (−2.68) 0.0098*** (3.17) −0.0449*** (−9.48)
HI − LI −0.0493*** (−8.33) −0.0126*** (−3.91) −0.0057* (−1.71) 0.0073** (2.03)

Note. This table reports the average benchmark‐adjusted returns for portfolios formed by sorting independently on idiosyncratic risk and stock price crash risk
in three factor model of Fama and French (1993). On month t, all A share stocks in Chinese stock markets are sorted into 16 portfolios by preranking both
idiosyncratic risk and stock price crash risk. The t statistics of the coefficient estimates are reported in parentheses. The sample period ranges from Jan 2005
to Dec 2015, covering a total of 132 months, and the sample includes the 937 common stocks in Shanghai Stock Exchange.
*Significance at the 10% level. **Significance at the 5% level. ***Significance at the 1% level

statistic = −3.91), −0.0057 (t statistic = −1.71), and
0.0073 (t statistic = 2.03) in different crash risk stocks.
Therefore, the negative NCSKEW effect (the positive
NCSKEW effect) among stocks with high idiosyncratic
risk is stronger than the negative NCSKEW effect (the
positive NCSKEW effect) among stocks with low idiosyn-
cratic risk. We interpret this evidence as suggesting that
the premium associated with stock price crash risk is
related to stock‐level idiosyncratic risk. Therefore, our
results consist with Kumar (2009) and reveal that inves-
tors with a gambling mindset find stock with high volatil-
ity, high skewness.
Specially, the benchmark‐adjusted returns for portfo-
lios formed by sorting stocks independently on idiosyn-
cratic risk and crash risk in Fama–French three factor
model are significant to reveal that some risk factors are
missing. Second, combining with our empirical results
and the results of Han and Kumar (2013), we further
hypotheses that the investor trading behaviour effects
may be stronger in stocks with high idiosyncratic risk
and high crash risk. To explore the behaviour‐related
implications discussed above, we provide more direct
evidence to reveal the investor trading behaviour effect
on double‐sorted portfolios by idiosyncratic risk and
crash risk. Specifically, we first conduct a sorting‐based
portfolio analysis, similar to that in Table 4, to answer
how investor trading behaviour affects double‐sorted
stock portfolios by idiosyncratic risk and crash risk in
Equations 7–8.
Table 5 presents the regression results to uncover that
the cross‐sectional effect of double‐sorted stock returns by
stock price crash risk and idiosyncratic risk is conditional
on investor trading behaviour. Specifically, Panel A of
Table 5 reports the estimates of βBSI in single factor
regression excluding the Fama–French three factors as
control variables. In detail, we can find that the IVOL
effect (highest minus lowest IVOL) is positively related
to investor trading behaviour and the NCSKEW effect
(Highest minus lowest NCSKEW) is also positively
related to investor trading behaviour. For the long‐short
IVOL portfolio stocks, the slopes on BSIp, t are equal to
0.5781 (t statistic = 6.80), 0.3962 (t statistic = 8.00),
0.4753(t statistic = 11.78), and 0.5146 (t statistic = 9.11)
on four NCSKEW‐sorted stocks. For the long‐short
NCSKEW portfolio stocks, the slopes on BSIp, t are equal
to 0.0.8292 (t statistic = 16.74), 0.6559 (t statistic = 13.05),
0.6432 (t statistic = 13.77), and 0.5462 (t statistic = 11.87)
on four IVOL‐sorted stocks. Furthermore, Panel A of
Table 5 shows that the effect of investor trading behav-
iour increases with crash risk and idiosyncratic risk,
which reveal that investors with a gambling mindset find
stock with high volatility, high skewness.
Next, we incorporate the Fama–French three factors
as control variables to explore the investor trading behav-
iour effects on double‐sorted portfolios in Panel B of
Table 5. We can also uncover that the IVOL effect
(Highest minus lowest IVOL) is positively related to
investor trading behaviour, and the NCSKEW effect
(Highest minus lowest NCSKEW) is positively related to
investor trading behaviour. Similarly, our results further
confirm that investor trading behaviour has strongest
effects on stocks with highest crash risk and highest idio-
syncratic risk and has weakest effects on stocks with low-
est crash risk and lowest idiosyncratic risk. Overall, the
stronger investor trading behaviour effect reveals that
investors gamble stocks with stronger lottery features,
which consists with Kumar (2009).
4 | R O B UST NE SS T E ST S
In this section, we conduct a final set of tests to ascertain
robustness of our results. First, we conduct the following
regression while controlling for additional variables to
affect stock returns, which the first three factors are those
of Fama and French (1992, 1993), and the fourth factor is
8 ZHOU AND HUANG

TABLE 5 The investor trading behaviour effect in double‐sorted portfolios by idiosyncratic risk and crash risk

H − NCSKEW Next 25% Next 25% L − NCSKEW HN − LN

Panel A: Excluding Fama–French three factors as control variables

H − IVOL 0.9397*** (22.89) 0.8015*** (30.05) 0.7950*** (31.42) 0.8888*** (28.13) 0.8292*** (16.74)
Next 25% 0.7602*** (27.84) 0.7338*** (31.56) 0.7308*** (33.01) 0.8367*** (26.99) 0.6559*** (13.05)
Next 25% 0.7176*** (28.82) 0.6877*** (31.60) 0.7090*** (32.21) 0.7836*** (27.53) 0.6432*** (13.77)
L − IVOL 0.6437*** (27.84) 0.6108*** (27.31) 0.6376*** (29.76) 0.7260*** (26.11) 0.5462*** (11.87)
HI − LI 0.5781*** (6.80) 0.3962*** (8.00) 0.4753*** (11.78) 0.5146*** (9.11)
Panel B: Including Fama–French three factors as control variables
H − IVOL 0.6398*** (8.77) 0.5286*** (10.49) 0.4835*** (10.58) 0.4290*** (8.14) 0.8242*** (16.41)
Next 25% 0.4259*** (9.59) 0.4184*** (9.74) 0.3658*** (9.03) 0.3576*** (6.80) 0.6333*** (13.02)
Next 25% 0.3502*** (8.86) 0.2935*** (7.92) 0.2747*** (7.15) 0.3150*** (6.38) 0.6204*** (13.52)
L − IVOL 0.2367*** (7.01) 0.1550*** (4.65) 0.1600*** (4.83) 0.1784*** (3.93) 0.5260*** (11.90)
HI − LI 0.9386*** (11.33) 0.5340*** (10.30) 0.5906*** (13.78) 0.6563*** (12.20)

Note. This table reports the factor model estimates for the stocks of Shanghai Stock Exchange in double‐sorted portfolios by stock price crash risk and idiosyn-
cratic risk. Panel A reports the investor trading behaviour effects on double‐sorted portfolios without the Fama–French three factors as control variables. Panel
B reports the investor trading behaviour effects on double‐sorted portfolios with the Fama–French three factors as control variables. On month t, all A share
stocks in Shanghai Stock Exchange are sorted into 16 portfolios by preranking both stock price crash risk and idiosyncratic risk. The t statistics of the coefficient
estimates are reported in parentheses. The sample period ranges from Jan 2005 to Dec 2015, covering a total of 132 months, and the sample includes the 937
common stocks in Shanghai Stock Exchange.
*Significance at the 10% level. **Significance at the 5% level. ***Significance at the 1% level.

the momentum factor shown in Jegadeesh and Titman
(1993) and Carhart (1997). Specifically, we run the follow-
ing regression to explore the investor trading behaviour
effect on stocks with heterogeneous crash risk:
Rp;t − Rf ;t ¼ α þ βRmrf Rmrf t þ βSmb Smbt þ βHml Hmlt
þ βMon Mont þ βBSI BSI p;t þ εp;t :
Here, Rp,t is the current return of stock portfolio p at
month t, R f ,t is the risk‐free rate of return at month t,
Rmrft is the market return in excess of risk‐free rate at
month t, Smbt is the difference between the value‐
weighted return of a portfolio of small stocks and the
value‐weighted return of a portfolio of large stocks at
month t, Hmlt is the difference between the value‐
weighted return of a portfolio of high B/M stocks and
the value‐weighted return of a portfolio of low B/M
stocks at month t, Mont is the difference between the
value‐weighted return of a portfolio of stocks with high
returns during months t − 12 to t − 2 and the value‐
weighted return of a portfolio of stocks with high returns
during monthst − 12 to t − 2, BSIp,t is the investor trading
behaviour of stock portfolio p at month t, and εp,t is the
residual return on the portfolio. The results are shown in
Table 6.
Table 6 presents how investor trading behaviour
affects stocks with heterogeneous crash risk. The analysis
indicates that the investor trading behaviour is also posi-
tively priced in NCSKEW‐sorted stock portfolios;
furthermore, the investor trading behaviour effect is
greater in “H − NCSKEW” portfolios than “L − NCSKEW”
portfolios with a t statistic of 12.21 including the Fama–
French three factors and the momentum factor as control
variables. When control variables are included in the
cross‐sectional regression, the investor trading behaviour
(10) is still strongly positively related to returns in skewness‐
sorted portfolios. Therefore, our robustness tests show
that stocks with high stock price crash risk are more
affected by investor trading behaviour than stocks with
low stock price crash risk. Our robustness tests show that
investors may be willing to undertake large amount of
short‐term risk (Han & Kumar, 2013), and investors'
desire to gamble or preference for stocks with strong lot-
tery features (Barberis & Huang, 2008; Shefrin &
Statman, 2000).
Second, we further investigate the investor trading
behaviour effect on stocks with heterogeneous crash risk
and heterogeneous idiosyncratic risk. Specifically, the
benchmark‐adjusted returns are estimates of α in the fol-
lowing regression:
Rp;t − Rf ;t ¼ α þ βRmrf Rmrf t þ βSmb Smbt
þ βHml Hmlt þ βMon Mont þ εp;t : (11)
Here, Rp,t is the current return of stock portfolio p at
month t, R f ,t is the risk‐free rate of return at month t,
Rmrft is the market return in excess of risk‐free rate at
month t, Smbt is the difference between the value‐
ZHOU AND HUANG 9

TABLE 6 The investor trading behaviour effects of subsamples of high versus low NCSKEW in four‐factor model

H − NCSKEW Next 25% Next 25% L − NCSKEW HN − LN

Rmrft 0.6370*** (9.86) 0.3924*** (8.23) 0.4235*** (8.71) 0.8635*** (11.80) −0.1123*** (−3.09)
Smbt 0.6073*** (6.52) 0.4371*** (5.55) 0.3392*** (4.76) 0.3844*** (4.38) 0.2230** (2.59)
Hmlt 0.0336 (0.34) 0.0738 (0.95) −0.0264 (−0.36) −0.3011*** (−2.98) 0.1767 (1.60)
Mont 0.0535 (1.34) 0.0488 (1.57) 0.0253 (0.85) −0.0955** (−2.44) 0.1594*** (3.68)
BSIp, t 0.3512*** (7.74) 0.4186*** (11.08) 0.4231*** (11.28) 0.2859*** (5.80) 0.5775*** (12.21)
Intercept −0.0395*** (−10.44) −0.0181*** (−7.10) −0.0099*** (−4.31) 0.0102*** (3.10) −0.0346*** (−7.21)
2
Adj. R 0.9160 0.9271 0.9344 0.9313 0.5921

Note. This table reports the investor trading behaviour effects on crash‐risk‐sorted portfolios with the Fama–French three factors and momentum factor as con-
trol variables. On month t, all A share stocks in Shanghai Stock Exchange are sorted into four portfolios by preranking stock price crash risk. The t statistics of
the coefficient estimates are reported in parentheses. The sample period ranges from Jan 2005 to Dec 2015, covering a total of 132 months, and the sample
includes the 937 common stocks in Shanghai Stock Exchange.
*Significance at the 10% level. **Significance at the 5% level. ***Significance at the 1% level.

weighted return of a portfolio of small stocks and the
value‐weighted return of a portfolio of large stocks at
month t, Hmlt is the difference between the value‐
weighted return of a portfolio of high B/M stocks and
the value‐weighted return of a portfolio of low B/M
stocks at month t, Mont is the difference between the
value‐weighted return of a portfolio of stocks with high
returns during months t − 12 to t − 2 and the value‐
weighted return of a portfolio of stocks with high returns
during monthst − 12 to t − 2, and εp,t is the residual
return on the portfolio.
Table 7 presents the results of the portfolio‐based
analysis of the stock price crash risk effect in different
individual stock idiosyncratic risk stock portfolios includ-
ing the Fama–French three factors and the momentum
factor as control variables. We find the benchmark‐
adjusted returns for portfolios formed by sorting stocks
independently on idiosyncratic risk and crash risk in the
four‐factor model decrease with stock price crash risk
and individual stock idiosyncratic risk. As a result, we
can see that the negative IVOL effect among the stocks
with high stock price crash risk is stronger than the pos-
itive IVOL effects among the stocks with low stock price
crash risk, which is consistent with Stambaugh et al.
(2015). And the negative NCSKEW effect (the positive
NCSKEW effect) among stocks with high idiosyncratic
risk is stronger than the negative NCSKEW effect (the
positive NCSKEW effect) among stocks with low idiosyn-
cratic risk. Overall, the empirical results are robustness
and reveal that some factors are missing in the four‐factor
model.
Next, we further regard the investor trading behaviour
as the fifth factor to examine the formation of stock
returns; therefore, we run the five‐factor regression
(Equation 10) to reveal the investor trading behaviour
effect in double‐sorted portfolio stocks by idiosyncratic
risk and crash risk.
Table 8 presents the investor trading behaviour effect
on double‐sorted portfolios by stock price crash risk and
idiosyncratic risk in Equation 10. We can also uncover
that the IVOL effect (highest minus lowest IVOL) is pos-
itively related to investor trading behaviour including

TABLE 7 The benchmark‐adjusted returns for portfolios formed by sorting stocks independently on idiosyncratic risk and crash risk with
the Fama–French three factors and momentum factor as control variables

H − NCSKEW Next 25% Next 25% L − NCSKEW HN − LN

H − IVOL −0.0827 (−12.77) −0.0327*** (−7.42) −0.0123*** (−2.98) 0.0168*** (3.92) −0.0996*** (−14.52)
Next 25% −0.0572*** (−13.34) −0.0291*** (−7.46) −0.0081** (−2.24) 0.0236*** (5.96) −0.0807*** (−13.74)
Next 25% −0.0437*** (−12.09) −0.0273*** (−8.04) −0.0091*** (−2.63) 0.0175*** (4.77) −0.0612*** (−11.23)
L − IVOL −0.0350*** (−12.02) −0.0225*** (−7.50) −0.0085*** (−2.71) 0.0089*** (2.86) −0.0439*** (−9.20)
HI − LI −0.0477*** (−8.04) −0.0108*** (−3.56) −0.0041 (−1.28) 0.0080** (2.21)

Note. This table reports the average benchmark‐adjusted returns for portfolios formed by sorting independently on idiosyncratic risk and stock price crash risk
in the four‐factor momentum model of Carhart (1997). On month t, all A share stocks in Chinese stock markets are sorted into 16 portfolios by preranking both
idiosyncratic risk and stock price crash risk. The t‐statistics of the coefficient estimates are reported in parentheses. The sample period ranges from Jan 2005 to
Dec 2015, covering a total of 132 months, and the sample includes the 937 common stocks in Shanghai Stock Exchange.
*Significance at the 10% level. **Significance at the 5% level. ***Significance at the 1% level.
10 ZHOU AND HUANG

TABLE 8 The investor trading behaviour effects of double‐sorted portfolios by idiosyncratic risk and crash risk with the Fama–French
three factors and momentum factor as control variables

H − NCSKEW Next 25% Next 25% L − NCSKEW HN − LN

H − IVOL 0.6325*** (8.71) 0.5083*** (10.46) 0.4674*** (10.22) 0.4353*** (8.24) 0.8246*** (16.73)
Next 25% 0.4256*** (9.56) 0.4159*** (9.72) 0.3530*** (8.68) 0.3646*** (7.15) 0.6376*** (13.65)
Next 25% 0.3510*** (8.89) 0.2895*** (7.89) 0.2690*** (6.96) 0.3218*** (6.69) 0.6310*** (14.51)
L − IVOL 0.2369*** (6.99) 0.1552*** (4.64) 0.1613*** (4.87) 0.1830*** (4.11) 0.5339*** (12.40)
HI − LI 0.9261*** (11.12) 0.4999*** (10.05) 0.5681*** (13.77) 0.6521*** (12.10)

Note. This table reports the investor trading behaviour effects on double‐sorted portfolios by stock price crash risk and idiosyncratic risk with the Fama–French
three factors and momentum factor as control variables. On month t, all A share stocks in Shanghai Stock Exchange are sorted into 16 portfolios by preranking
both stock price crash risk and idiosyncratic risk. The t statistics of the coefficient estimates are reported in parentheses. The sample period ranges from Jan 2005
to Dec 2015, covering a total of 132 months, and the sample includes the 937 common stocks in Shanghai Stock Exchange.
*Significance at the 10% level. **Significance at the 5% level. ***Significance at the 1% level.

four factors as control variables, and the NCSKEW effect
(highest minus lowest NCSKEW) is positively related to
investor trading behaviour including four factors as con-
trol variables. Similarly, including the Fama–French
three factors and momentum factor as control variables,
our results further confirm that investor trading behav-
iour has strongest effects on stocks with highest crash risk
and highest idiosyncratic risk and has weakest effects on
stocks with lowest crash risk and lowest idiosyncratic
risk. Overall, the cross‐sectional effect of investor trading
behaviour reveals that investors gamble stocks with
higher crash risk and higher idiosyncratic risk.
Overall, our robustness tests do confirm that investor
trading behaviour is priced in stock prices, and investors
gamble or prefer for stocks with higher idiosyncratic risk
and stock price crash risk.

TABLE 9 Results in subperiods

H − NCSKEW Next 25% Next 25% L − NCSKEW HN − LN

Panel A: Subperiods from 2005.01 to 2010.03

Rmrft 0.5105*** (4.84) 0.2728*** (4.70) 0.2711*** (4.27) 0.8982*** (6.42) −0.0936* (−1.81)
Smbt 0.5495*** (4.09) 0.3689*** (3.91) 0.2414*** (2.72) 0.4952*** (3.58) 0.1510 (1.22)
Hmlt 0.1889 (1.04) 0.2676** (2.21) 0.2048* (1.68) −0.2698 (−1.33) 0.1129 (0.53)
Mont 0.0577 (0.98) 0.0689* (1.77) 0.0379 (0.95) −0.0467 (−0.75) 0.1216* (1.87)
BSIp,t 0.4872*** (5.67) 0.5751*** (11.01) 0.5957*** (10.71) 0.2755*** (2.58) 0.7389*** (8.17)
Intercept −0.0414*** (−6.71) −0.0197*** (−5.29) −0.0138*** (−3.86) 0.0083 (1.38) −0.0326*** (−4.14)
Adj. R2 0.9189 0.9496 0.9465 0.9234 0.5851
Panel B: Subperiods from 2010.04 to 2015.12
Rmrft 0.6870*** (8.03) 0.5418*** (7.50) 0.6735*** (9.91) 0.7862*** (8.94) −0.1113** (−2.10)
Smbt 0.5359*** (4.14) 0.4157*** (3.74) 0.4859*** (5.20) 0.1585 (1.41) 0.2909** (2.46)
Hmlt −0.1355 (−1.15) −0.1775* (−1.95) −0.2288*** (−2.97) −0.4166*** (−3.87) 0.2103* (1.67)
Mont 0.0212 (0.42) 0.0252 (0.64) 0.0067 (0.20) −0.1724*** (−3.80) 0.1975(3.70)
BSIp,t 0.2923*** (6.04) 0.2688*** (5.78) 0.2170(5.07) 0.3196(6.71) 0.4965(10.46)
Intercept −0.0368*** (−8.59) −0.0161(−5.92) −0.0053(−2.43) 0.0116 (3.51) −0.0355(−6.65)
Adj. R2 0.9236 0.9330 0.9559 0.9461 0.6610

Note. This table reports the investor trading behaviour effects for the stocks of Shanghai Stock Exchange with the Fama–French three factors as control variables
in subperiods. Panel A reports the investor trading behaviour effects on crash‐risk‐sorted portfolios with the Fama–French three factors and momentum factor
as control variables from 2005.01 to 2010.03. Panel B reports the investor trading behaviour effects on crash‐risk‐sorted portfolios with the Fama–French three
factors and momentum factor as control variables from 2010.04 to 2015.12. On month t, all A share stocks in Shanghai Stock Exchange are sorted into four
portfolios by preranking stock price crash risk. The t statistics of the coefficient estimates are reported in parentheses. The sample period ranges from Jan
2005 to Dec 2015, covering a total of 132 months, and the sample includes the 937 common stocks in Shanghai Stock Exchange.
*Significance at the 10% level. **Significance at the 5% level. ***Significance at the 1% level.
ZHOU AND HUANG 11

5 | FURTHER TESTS the investor trading behaviour effect in subsamples and

The results presented so far show that the investor trad-
ing behaviour is priced in stock prices, and investors gam-
ble or prefer for stocks with higher idiosyncratic risk and
stock price crash risk. Is the existence of investor trading
behaviour unique to the research sample, or are these
results general in the stock market, rather than being
evert‐specific? To address this question, we further ana-
lyse the impacts of investor trading behaviour in the fol-
lowing circumstances. First, we examine the investor
trading behaviour effect in subperiods. Second, we test
subperiods.
5.1 | Subperiods
In order to address the investor trading behaviour in sub-
periods, we first split the sample into two intervals
according to the introduction of Share Price Index
Futures in Chinese Stock Markets2: subperiods from
2005.01 to 2010.03 and subperiods from 2010.04 to
2015.12. We then run the Equation 10 to explore the
investor trading behaviour effect on stocks with

TABLE 10 Results in subsamples and subperiods

H − NCSKEW Next 25% Next 25% L − NCSKEW HN − LN

Panel A: Subsamples excluding observations in the top and bottom one percentile
Rmrft 0.6088*** (9.69) 0.5739*** (10.97) 0.6877*** (13.12) 0.8787*** (11.63) −0.1318*** (−3.52)
Smbt 0.5896*** (6.41) 0.6030*** (7.83) 0.5419*** (8.25) 0.3942*** (4.37) 0.2014** (2.26)
Hmlt 0.0796 (0.81) 0.0369 (0.52) −0.1110* (−1.73) −0.3091*** (−2.97) 0.2066* (1.80)
Mont 0.0799** (2.02) 0.0546* (1.91) 0.0441* (1.72) −0.0968** (−2.41) 0.1846*** (4.13)
BSIp,t 0.3651*** (8.59) 0.2930*** (7.41) 0.2400*** (6.19) 0.2805*** (5.59) 0.5940*** (12.80)
Intercept −0.0375*** (−10.28) −0.0210*** (−8.77) −0.0097*** (−4.83) 0.0074** (2.24) −0.0307*** (−6.56)
Adj. R2 0.9185 0.9456 0.9576 0.9292 0.6186
Panel B: Subsamples and subperiods from 2005.01 to 2010.03
Rmrft 0.4722*** (4.67) 0.4672*** (6.68) 0.5501*** (6.61) 0.9016*** (6.17) −0.1161** (−2.19)
Smbt 0.5147*** (3.87) 0.5365*** (5.60) 0.4349*** (4.79) 0.4957*** (3.47) 0.1061 (0.82)
Hmlt 0.2441 (1.36) 0.2645** (2.37) 0.1465 (1.32) −0.2448 (−1.17) 0.1098 (0.49)
Mont 0.0682 (1.18) 0.0662* (1.87) 0.0525 (1.49) −0.0365 (−0.57) 0.1261* (1.88)
BSIp,t 0.5078*** (6.38) 0.4217*** (7.16) 0.3752*** (5.43) 0.2834*** (2.59) 0.7673*** (8.63)
Intercept −0.0409*** (−6.87) −0.0237*** (−6.75) −0.0144*** (−4.47) 0.0054 (0.89) −0.0302*** (−3.90)
Adj. R2 0.9230 0.9628 0.9625 0.9209 0.6117
Panel C: Subsamples and subperiods from 2010.04 to 2015.12
Rmrft 0.6667*** (8.38) 0.6082*** (8.34) 0.7824*** (11.76) 0.7997*** (9.09) −0.1196** (−2.31)
Smbt 0.5202*** (4.30) 0.4882*** (4.36) 0.5739*** (6.39) 0.1781 (1.57) 0.2807** (2.42)
Hmlt −0.1029 (−0.92) −0.1999** (−2.21) −0.2681*** (−3.68) −0.4323*** (−4.01) 0.2518** (2.04)
Mont 0.0716 (1.50) 0.0358 (0.91) 0.0156 (0.49) −0.1924*** (−4.23) 0.2575*** (4.92)
BSIp,t 0.3009*** (7.00) 0.2267*** (4.86) 0.1544*** (3.74) 0.3073*** (6.53) 0.5061*** (11.55)
Intercept −0.0336*** (−8.61) −0.0177*** (−6.50) −0.0056*** (−2.71) 0.0090*** (2.79) −0.0303*** (−6.23)
Adj. R2 0.9314 0.9428 0.9662 0.9466 0.7141

Note. This table reports the investor trading behaviour effects for the stocks of Shanghai Stock Exchange with the Fama–French three factors as control variables
in subperiods and subsamples. Panel A reports the investor trading behaviour effects on crash‐risk‐sorted portfolios with the Fama–French three factors and
momentum factor as control variables excluding observations in the top and bottom one percentile from 2005.01 to 2015.12. Panel B reports the investor trading
behaviour effects on crash‐risk‐sorted portfolios with the Fama–French three factors and momentum factor as control variables excluding observations in the
top and bottom one percentile from 2005.01 to 2010.03. Panel C reports the investor trading behaviour effects on crash‐risk‐sorted portfolios with the Fama–
French three factors and momentum factor as control variables excluding observations in the top and bottom one percentile from 2010.04 to 2015.12. On month
t, all A share stocks in Shanghai Stock Exchange are sorted into 4 portfolios by preranking stock price crash risk. The t statistics of the coefficient estimates are
reported in parentheses. The sample period ranges from Jan 2005 to Dec 2015, covering a total of 132 months, and the sample includes the 937 common stocks
in Shanghai Stock Exchange.
*Significance at the 10% level. **Significance at the 5% level. ***Significance at the 1% level.
12
heterogeneous crash risk. The results are in Table 9 and
support those obtained results for the original sample.
The investor trading behaviour plays significant roles
on stocks with heterogeneous crash risk. Specifically,
the investor trading behaviour effect is greater in
“H − NCSKEW” portfolios than “L − NCSKEW” portfo-
lios with a t statistic of 8.17 including the Fama–French
three factors and the momentum factor as control vari-
ables from 2005.01 to 2010.03, and the investor trading
behaviour effect is greater in “H − NCSKEW” portfolios
than “L − NCSKEW” portfolios with a t statistic of 10.46
including the Fama–French three factors and the
momentum factor as control variables from 2010.04 to
2015.12. Therefore, the stocks with high stock price crash
risk are more affected by investor trading behaviour than
stocks with low stock price crash risk.
Furthermore, we split the sample into two segments
(Before 2008.01 and Since 2008.01) to test the roles of
investor trading behaviour, crash risk, and stock prices.
Our untabulated results obtain qualitatively similar
results. In addition, our untabulated results obtain quali-
tatively similar results in double‐sorted stock portfolios by
crash risk and idiosyncratic risk and reveal that the effect
of investor trading behaviour increases with crash risk
and idiosyncratic risk in subperiods (Before 2010.04 and
Since 2010.04; Before 2008.01 and Since 2008.01), which
reveal that investors with a gambling mindset find stock
with high volatility, high skewness. Collectively, we can
prove the robustness of our results in subperiods.
5.2 | Subsamples and subperiods
A further examination of the relation among investor
trading behaviour, crash risk, and stock prices will be
tested in subsamples and subperiods. First, we eliminate
data outlier by excluding observations that the value of
investor trading behaviour or stock price crash risk fall
in the top and bottom one percentile in every trading
day. We then run the Equation 10 to explore the investor
trading behaviour effect on stocks with heterogeneous
crash risk. And we also split our research sample into
two intervals according to the introduction of Share Price
Index Futures in Chinese Stock Markets. The results are
in Table 10 and support those obtained results of the orig-
inal sample.
In Panel A of Table 10, the investor trading behaviour
effect is 0.5940 (t statistic = 12.80) for the long‐short port-
folios sorted by stock price crash risk including the
Fama–French three factors and the momentum factor
after eliminating data outlier. And the investor trading
behaviour effects are 0.7673 (t statistic = 8.63) and
0.5061 (t statistic = 11.55) in subperiods from 2005.01 to
ZHOU AND HUANG
2010.03 and subperiods from 2010.04 to 2015.12 after
eliminating data outlier in Panels B and C of Table 10.
Moreover, our untabulated results obtain qualitatively
similar results in double‐sorted stock portfolios by crash
risk and idiosyncratic risk and reveal that the effect of
investor trading behaviour increases with crash risk and
idiosyncratic risk in subperiods and subsamples (Before
2010.04 and Since 2010.04; Before 2008.01 and Since
2008.01). Besides, we exclude the trading data from Janu-
ary and December to test the relation among investor
trading behaviour, crash risk, and stock prices. The
results are slightly stronger when returns, investor
trading behaviour, and crash risk form January and
December are removed from the sample, which indicates
that tax‐motivated trading and associated fluctuations in
liquidity around the turn of the year do not drive the
main results.
In summary, our regression results essentially con-
firm the relations among investor trading behaviour,
crash risk, and stock returns in our sorted results and
prove the robustness of our results in subperiods and
subsamples.
6 | C ON C L U S I ON
This paper provides evidence consistent with the view
that investors gamble lottery‐like stocks. Using investor
trading behaviour index of Chinese stock markets, we
show directly that investor trading behaviour has a
greater impact on stocks with higher crash risk to imply
investors overreact to stocks with higher stock price crash
risk. Furthermore, investor trading behaviour has the
strongest effect on stocks with highest crash risk and
highest idiosyncratic risk and has the weakest effect on
stocks with lowest crash risk and lowest idiosyncratic
risk. Last, the stronger investor trading behaviour effect
reveals that investors gamble stocks with stronger lottery
features.
These findings support a growing body of evidence of
investor trading behaviour effect such as speculative trad-
ing and stock prices (Han & Kumar, 2013). Our results
are also consistent with recent evidence that stock price
crash risk effect (Chen et al., 2001) and may also help
explain why investors gamble lottery‐like stocks (Kumar,
2009). Further investigating the broader implications of
investor trading behaviour on market inefficiency is an
interesting area of future study. In the future, we intend
to look at the roles of retail investor trading behaviour
and institutional investor trading behaviour on asset pric-
ing and further uncover their roles on stock price crash
risk. Moreover, we can extract expected and unexpected
investor trading behaviour to test how expected trading
ZHOU AND HUANG
behaviour and unexpected trading behaviour affect stock
price crash risk. This can be a promising ground for
future research.
ACK NO WLE DGE MEN TS
We wish to thank the editors and the anonymous
reviewer for insightful comments on our work. This work
was supported by the project of Guangdong Planning
office of Philosophy and Social Science in 2017
(GD17XLJ04 and GD17XGL14), the Natural Science
Foundation of Guangdong Province (2018A030310218),
and the youth project of Department of Education of
Guangdong Province (2017WQNCX014).
E N D N O T ES
1
Historically, the Chinese domestic A‐shares are divided into tradable and
nontradable shares, although both types of shares have the same cash flow
and voting rights. This unique split share structure can lead to divergent
interests and incentive conflicts between tradable and nontradable share-
holders and has long been recognized as the source of many corporate
governance problems in China. The aim of the Chinese Split Share Struc-
ture Reform is to convert nontradable shares into tradable shares.
2
The introduction of stock index futures in China in 2010 marked an impor-
tant development in the country's financial markets. The first Share Price
Index Future of Chinese Stock Markets is CSI 300 stock index future,
which is officially listed on April 16, 2010. Extant papers test how the intro-
duction of index futures affects the stability of stock markets and prove the
price discovery and volatility spillover relationship between the stock
prices and stock index futures (Kutan, Shi, Wei, & Zhao, 2018; Miao,
Ramchander, Wang, & Yang, 2017). Therefore, this paper split the research
sample into two intervals according to the introduction of Share Price
Index Futures in Chinese Stock Markets to test the roles of investor trading
behaviour in subperiods.
ORCID
Liyun Zhou http://orcid.org/0000-0001-8543-6919
Jialiang Huang http://orcid.org/0000-0002-8387-7320
R EF E RE N C E S
An, H., & Zhang, T. (2013). Stock price synchronicity, crash risk,
and institutional investors. Journal of Corporate Finance, 21,
1–15.
Ang, A., Hodrick, R. J., Xing, Y., & Zhang, X. (2006). The cross‐sec-
tion of volatility and expected returns. The Journal of Finance,
61(1), 259–299.
Barber, B. M., Odean, T., & Zhu, N. (2009). Do retail trades move
markets? Review of Financial Studies, 22(1), 151–186.
Barberis, N., & Huang, M. (2008). Stocks as lotteries: The implica-
tions of probability weighting for security prices. American
Economic Review, 98, 2066–2100.
Ben‐Nasr, H., & Ghouma, H. (2018). Employee welfare and stock
price crash risk. Journal of Corporate Finance, 48, 700–725.
13
Blume, M. E., MacKinlay, A. C., & Terker, B. (1989). Order imbal-
ances and stock price movements on October 19 and 20, 1987.
The Journal of Finance, 44(4), 827–848.
Boyer, B., Mitton, T., & Vorkink, K. (2010). Expected idiosyncratic
skewness. Review of Financial Studies, 23(1), 169–202.
Callen, J. L., & Fang, X. (2015). Short interest and stock price crash
risk. Journal of Banking & Finance, 60, 181–194.
Carhart, M. M. (1997). On persistence in mutual fund performance.
The Journal of Finance, 52(1), 57–82.
Chen, J., Hong, H., & Stein, J. C. (2001). Forecasting crashes: Trad-
ing volume, past returns, and conditional skewness in stock
prices. Journal of Financial Economics, 61(3), 345–381.
Chen, Z., Lin, W. T., Ma, C., & Tsai, S. (2014). Liquidity provisions
by individual investor trading prior to dividend announcements:
Evidence from Taiwan. The North American Journal of Econom-
ics and Finance, 28, 358–374.
Chordia, T., Roll, R., & Subrahmanyam, A. (2002). Order imbal-
ance, liquidity, and market returns. Journal of Financial
Economics, 65(1), 111–130.
Fama, E. F., & French, K. R. (1992). The cross‐section of expected
stock returns. The Journal of Finance, 47(2), 427–465.
Fama, E. F., & French, K. R. (1993). Common risk factors in the
returns on stocks and bonds. Journal of Financial Economics,
33(1), 3–56.
Fu, F. (2009). Idiosyncratic risk and the cross‐section of expected
stock returns. Journal of Financial Economics, 91(1), 24–37.
Han, B., & Kumar, A. (2013). Speculative retail trading and asset
prices. Journal of Financial and Quantitative Analysis, 48(2),
377–404.
Hong, H., & Stein, J. C. (2003). Differences of opinion, short‐sales
constraints, and market crashes. Review of Financial Studies,
16(2), 487–525.
Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque finan-
cial reports, R 2, and crash risk. Journal of Financial Economics,
94(1), 67–86.
Hvidkjaer, S. (2006). A trade‐based analysis of momentum. Review
of Financial Studies, 19(2), 457–491.
Hvidkjaer, S. (2008). Small trades and the cross‐section of stock
returns. Review of Financial Studies, 21, 1123–1151.
Jegadeesh, N., & Titman, S. (1993). Returns to buying winners and
selling losers: Implications for stock market efficiency. The Jour-
nal of Finance, 48(1), 65–91.
Jin, L., & Myers, S. C. (2006). R 2 around the world: New theory and
new tests. Journal of Financial Economics, 79(2), 257–292.
Kim, J. B., Li, Y., & Zhang, L. (2011). Corporate tax avoidance and
stock price crash risk: Firm‐level analysis. Journal of Financial
Economics, 100(3), 639–662.
Kim, J. B., & Zhang, L. (2013). Accounting conservatism and stock
price crash risk: Firm‐level evidence. SSRN working paper.
Kim, Y., Li, H., & Li, S. (2014). Corporate social responsibility and
stock price crash risk. Journal of Banking & Finance, 43, 1–13.
Kumar, A. (2009). Who gambles in the stock market? The Journal of
Finance, 64(4), 1889–1933.
14
Kumar, A., & Lee, C. (2006). Retail investor sentiment and return
comovements. The Journal of Finance, 61(5), 2451–2486.
Kumar, A., Page, J. K., & Spalt, O. G. (2013). Investor sentiment and
return comovements: Evidence from stock splits and headquar-
ters changes. Review of Finance, 17(3), 921–953.
Kutan, A. M., Shi, Y., Wei, M., & Zhao, Y. (2018). Does the intro-
duction of index futures stabilize stock markets? Further
evidence from emerging markets. International Review of
Economics & Finance.
Lee, C., & Ready, M. J. (1991). Inferring trade direction from intra-
day data. The Journal of Finance, 46(2), 733–746.
Li, X., Wang, S. S., & Wang, X. (2017). Trust and stock price crash
risk: Evidence from China. Journal of Banking & Finance, 76,
74–91.
Malmendier, U., & Shanthikumar, D. M. (2007). Are small investors
naive about incentives? Journal of Financial Economics, 85,
457–489.
Miao, H., Ramchander, S., Wang, T., & Yang, D. (2017). Role of
index futures on China's stock markets: Evidence from price dis-
covery and volatility spillover. Pacific‐Basin Finance Journal, 44,
13–26.
Qian, X. (2014). Small investor sentiment, differences of opinion
and stock overvaluation. Journal of Financial Markets, 19,
219–246.
Shefrin, H. M., & Statman, M. (2000). Behavioral Portfolio Theory.
Journal of Financial and Quantitative Analysis, 35, 127–151.
ZHOU AND HUANG
Stambaugh, R. F., Yu, J., & Yuan, Y. (2015). Arbitrage asymmetry
and the idiosyncratic volatility puzzle. The Journal of Finance,
70(5), 1903–1948.
Stein, J. C. (2009). Presidential address: Sophisticated investors and
market efficiency. The Journal of Finance, 64(4), 1517–1548.
Xu, N., Jiang, X., Chan, K. C., & Yi, Z. (2013). Analyst coverage,
optimism, and stock price crash risk: Evidence from China.
Pacific‐Basin Finance Journal, 25, 217–239.
Xu, N., Li, X., Yuan, Q., & Chan, K. C. (2014). Excess perks and
stock price crash risk: Evidence from China. Journal of Corpo-
rate Finance, 25, 419–434.
Yan, P. (2013). Crowded trades, short covering and momentum
crashes, SSRN Working Papers.
Yang, C., & Zhou, L. (2015). Investor trading behavior, investor sen-
timent and asset prices. The North American Journal of
Economics and Finance, 34, 42–62.
Yin, Y., & Tian, R. (2017). Investor sentiment, financial report qual-
ity and stock price crash risk: Role of short‐sales constraints.
Emerging Markets Finance and Trade, 53(3), 493–510.
How to cite this article: Zhou L, Huang J.
Investor trading behaviour and stock price crash
risk. Int J Fin Econ. 2018;1–14. https://doi.org/
10.1002/ijfe.1659