Quantitative analysis of the trader's outperforming capacity in a social trading platform

Identifier:  TFG:4849

Handle: https://hdl.handle.net/20.500.11797/TFG4849

Authors:  Shevchuk, Dariya

Abstract:
This final thesis analyses the performance of 30 top signalers recommended by a leading social trading platform, eToro. By doing a quantitative analysis, it aims to study each trader’s outperforming capacity and its correlation with the independent variable of the number of copiers. The research methodology is based on a manual compiling of each signalers annual stocks trading activity and, the application of OLS regression by using Gretl Software. The eToro signaler, according to the findings, tends to underperform the stock market and the S&P 500 index. Additionally,our results showed the existence of a negative correlation between each signaler's number of copiers and its abnormal result. The justification of such results is supported by mainly two commonly identified financial behaviors: overconfidence and hindsight biases. The results obtained enable us to conclude certain casuistries. Social trading users should be more aware of certain variables when choosing a signaler whose trades to follow. eToro’s users tend to think that the top traders with the highest number of copiers tend to perform better. And consequently, decide to follow them. The result of this behavior creates an overconfident bias, which is afterwards reflected by investments in riskier stocks, which leads to an underperforming portfolio.