Are retail or institutional investors’ shareholdings and market turnover ratio determinants of the negativity of the security market line in the Taiwan stock?

Are retail or institutional investors’ shareholdings and market turnover ratio determinants of the negativity of the security market line in the Taiwan stock?

This study investigates the curvature of the Security Market Line (SML) and examines whether retail or institutional investors play a key role in shaping the SML in the Taiwan stock market. The empirical results of Fama-MacBeth regression reveal a negative SML slope in the Taiwan stock market. In addition, the overconfident hypotheses on market turnover ratio, retail investors, and three types of institutional investors are examined. The results indicate that unsophisticated (retail) investors are more influential than the market turnover ratio in shaping the negativity of the SML. By contrast, institutional investors tend to support a positive traditional SML in the Taiwan stock market.