Are individual or institutional investors the agents of bubbles?

• Behavioral bubble models and burgeoning empirical literature often assume that individual investors cause bubbles.
• Another common assumption is that informed institutions trade like contrarian, against bubbles.
• To meet this requirement, our transaction data account for virtually all trading of non-financial Korean firms by all market participants.
• This paper apparently is the first empirical work in meeting this theoretical requirement as our transaction data account for virtually all trading of non-financial Korean firms by all market participants.
• We find that individual investors are NOT the agents of bubbles. The agents of bubbles are foreign investors and some domestic institutions.

Behavioral bubble models typically assume that uninformed trend-chasers, presumably individual investors, cause bubbles, while informed contrarian investors such as institutions, trade against bubbles. DeLong et al. (1990a) highlight that to be considered a “bubble”, the mis-pricing must prevail in a large, diversified portfolio. To meet this criterion, we use a unique dataset of all transactions by investor type for all non-financial Korean firms, and find evidence at odds with such assumptions. Domestic individual investors systematically apply aggressive contrarian trades, while foreign and some domestic institutions are mostly trend-chasers. These findings suggest that institutional investors rather than individuals are agents of bubbles.