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.