Hostname: page-component-cd9895bd7-p9bg8 Total loading time: 0 Render date: 2024-12-28T20:32:14.041Z Has data issue: false hasContentIssue false
  • English
  • Français

Flattening the Illiquidity Curve: Retail Trading During the COVID-19 Lockdown

Published online by Cambridge University Press:  05 July 2021

Gideon Ozik ,
Ronnie Sadka Open the ORCID record for Ronnie Sadka [Opens in a new window]  and
Siyi Shen
Gideon Ozik
Affiliation:
EDHEC Business [email protected]
Ronnie Sadka*
Affiliation:
Boston College Carroll School of Management
Siyi Shen
Affiliation:
Chinese University of Hong Kong, Shenzhen School of Management and Economics [email protected]
*
[email protected] (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

This article studies the impact of retail investors on stock liquidity during the COVID-19 pandemic lockdown in spring 2020. Retail trading exhibits a sharp increase, especially among stocks with high COVID-19–related media coverage. Retail trading attenuated the rise in illiquidity by roughly 40% but less so for high-media-attention stocks. Causality is addressed using the staggered implementation of the stay-at-home advisory across U.S. states. The results highlight that ample free time and access to financial markets facilitated by fintech innovations to trading platforms are significant determinants of retail-investor stock market participation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 7: JFQA Symposium on the Consequences of the COVID-19 Pandemic for Firms and Capital Markets , November 2021 , pp. 2356 - 2388
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

Ozik and Sadka are affiliated with MKT MediaStats, LLC. For helpful comments and suggestions, we thank Philip Bond, Ran Duchin (editor), Slava Fos, Thierry Foucault, Jarrad Harford (editor), Zhiguo He, David Hirshleifer, Mark Kamstra, Stefan Nagel, Lin Peng, Alessandro Rebucci, Alexi Savov, Amit Seru, Kelly Shue, Phil Strahan, Dick Syron, Pierre-Olivier Weill, Wei Xiong, and Liyan Yang, as well as seminar and conference participants at Hebrew University, Stockholm Business School, Tel Aviv University, the University of South Carolina, the U.S. Securities and Exchange Commission, the 2020 Journal of Finance/Fama--Miller Center Conference on the Financial Consequences of the COVID-19 Pandemic, the 2021 Australasian Finance and Banking Conference, State Street Associates, the Goldman Sachs QES Academic Research Club, the 2021 Midwest Finance Association (MFA) Annual Conference, and the 2021 Journal of Financial and Quantitative Analysis COVID Symposium. The views expressed are solely those of the authors.

References

Barber, B. M.; Huang, X.; Odean, T.; and Schwarz, C.. “Attention-Induced Trading and Returns: Evidence from Robinhood Users.” Working Paper, University of California at Davis (2021).CrossRefGoogle Scholar
Barber, B. M., and Odean, T.. “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors.” Review of Financial Studies , 21 (2008), 785–818.CrossRefGoogle Scholar
Barrot, J.; Kaniel, R.; and Sraer, D.. “Are Retail Traders Compensated for Providing Liquidity?” Journal of Financial Economics , 120 (2016), 146–168.CrossRefGoogle Scholar
Ben-Rephael, A.; Da, Z.; and Israelsen, R. D.. “It Depends on Where You Search: Institutional Investor Attention and Underreaction to News.” Review of Financial Studies , 30 (2017), 3009–3047.CrossRefGoogle Scholar
Brunnermeier, M. K., and Pedersen, L. H.. “Market Liquidity and Funding Liquidity.” Review of Financial Studies , 22 (2008), 2201–2238.CrossRefGoogle Scholar
Campbell, J. “Household Finance.” Journal of Finance , 61 (2006), 1553–1604.CrossRefGoogle Scholar
Collin-Dufresne, P., and Fos, V.. “Do Prices Reveal the Presence of Informed Trading?” Journal of Finance , 70 (2015), 1555–1582.CrossRefGoogle Scholar
Collin-Dufresne, P., and Fos, V.. “Insider Trading, Stochastic Liquidity, and Equilibrium Prices.” Econometrica , 84 (2016), 1441–1475.CrossRefGoogle Scholar
Cookson, J. A.; Fos, V.; and Niessner, M.. “Does Disagreement Facilitate Informed Trading? Evidence from Activist Investors.” Working Paper, University of Colorado (2021).CrossRefGoogle Scholar
Coval, J. D., and Moskowitz, T. J.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance , 54 (1999), 2045–2073.CrossRefGoogle Scholar
Da, Z.; Engelberg, J.; and Gao, P.. “In Search of Attention.” Journal of Finance , 66 (2011), 1461–1499.CrossRefGoogle Scholar
Eaton, G. W.; Green, T. C.; Roseman, B.; and Wu, Y.. “Zero-Commission Individual Investors, High Frequency Traders, and Stock Market Quality.” Working Paper, Oklahoma State University (2021).CrossRefGoogle Scholar
Engelberg, J. E., and Parsons, C. A.. “The Causal Impact of Media in Financial Markets.” Journal of Finance , 66 (2011), 67–97.CrossRefGoogle Scholar
Fang, V. W.; Madsen, J.; and Shao, X.. “Noise Trading: An Ad-Based Measure.” Working Paper, University of Minnesota (2020).Google Scholar
Foucault, T.; Sraer, D.; and Thesmar, D. J.. “Individual Investors and Volatility.” Journal of Finance , 66 (2011), 1369–1406.CrossRefGoogle Scholar
Grinblatt, M.; Keloharju, M.; and Linnainmaa, J.. “IQ and Stock Market Participation.” Journal of Finance , 66 (2011), 2121–2164.CrossRefGoogle Scholar
Haliassos, M., and Bertaut, C.. “Why Do So Few Hold Stocks?” Economic Journal , 105 (1995), 1110–1129.CrossRefGoogle Scholar
Holden, C. W., and Jacobsen, S.. “Liquidity Measurement Problems in Fast, Competitive Markets: Expensive and Cheap Solutions.” Journal of Finance , 69 (2014), 1747–1785.CrossRefGoogle Scholar
Ivković, Z., and Weisbenner, S.. “Local Does as Local Is: Information Content of the Geography of Individual Investors’ Common Stock Investments.” Journal of Finance , 60 (2005), 267–306.CrossRefGoogle Scholar
Kyle, A. S. “Continuous Auctions and Insider Trading.” Econometrica , 53 (1985), 1315–1335.CrossRefGoogle Scholar
Lee, C. M. C., and Ready, M. J.. “Inferring Trade Direction from Intraday Data.” Journal of Finance , 46 (1991), 733–746.CrossRefGoogle Scholar
Li, L.; Strahan, P. E.; and Zhang, S.. “Banks as Lenders of First Resort: Evidence from the COVID-19 Crisis.” Review of Corporate Finance Studies, 9 (2020), 472–500.CrossRefGoogle Scholar
Lou, D. “Attracting Investor Attention Through Advertising.” Review of Financial Studies, 27 (2014), 1797–1829.CrossRefGoogle Scholar
Odean, T. “Do Investors Trade Too Much?” American Economic Review , 89 (1999), 1279–1298.CrossRefGoogle Scholar
Peress, J., and Schmidt, D.. “Glued to the TV: Distracted Noise Traders and Stock Market Liquidity.” Journal of Finance , 75 (2020), 1083–1133.CrossRefGoogle Scholar
Van Rooij, M.; Lusardi, A.; and Alessie, R.. “Financial Literacy and Stock Market Participation.” Journal of Financial Economics , 101 (2011), 449–472.CrossRefGoogle Scholar
Vissing-Jorgensen, A. “Perspectives on Behavioral Finance: Does ‘Irrationality’ Disappear with Wealth? Evidence from Expectations and Actions.” NBER Macroeconomics Annual , 18 (2003), 139–194.CrossRefGoogle Scholar
von Beschwitz, B.; Keim, D. B.; and Massa, M.. “First to ‘Read’ the News: News Analytics and Algorithmic Trading.” Review of Asset Pricing Studies , 10 (2020), 122–178.CrossRefGoogle Scholar
Welch, I. “Wisdom of the Robinhood Crowd.” Working Paper, University of California, Los Angeles (2021).CrossRefGoogle Scholar
Yang, L., and Zhu, H.. “Back-Running: Seeking and Hiding Fundamental Information in Order Flows.” Review of Financial Studies , 33 (2020), 1484–1533.CrossRefGoogle Scholar
Supplementary material: PDF

Ozik et al. supplementary material

Ozik et al. supplementary material

Download Ozik et al. supplementary material(PDF)
PDF 369.4 KB