Hostname: page-component-745bb68f8f-b95js Total loading time: 0 Render date: 2025-02-09T01:10:01.415Z Has data issue: false hasContentIssue false
  • English
  • Français

Resolving a Paradox: Retail Trades Positively Predict Returns but Are Not Profitable

Published online by Cambridge University Press:  05 May 2023

Brad M. Barber ,
Shengle Lin  and
Terrance Odean
Brad M. Barber
Affiliation:
University of California Davis Graduate School of Management [email protected]
Shengle Lin*
Affiliation:
San Francisco State University Lam Family College of Business
Terrance Odean
Affiliation:
University of California Berkeley Haas School of Business [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Retail order imbalance positively predicts returns, but on average retail investor trades lose money. Why? Order imbalance tests equal-weighted stocks, but retail purchases concentrate on attention-grabbing stocks that subsequently underperform. Long–short strategies based on extreme quintiles of retail order imbalance earn dismal annualized returns of −14.8% among stocks with heavy retail trading but earn 6.6% among other stocks. Our results reconcile the literatures on the performance of retail investors, the predictive content of retail order imbalance, and attention-induced trading and returns. Smaller retail trades concentrate more on attention-grabbing stocks and perform worse.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 6 , September 2024 , pp. 2547 - 2581
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We appreciate the comments of Jennifer Conrad (the editor), Greg Eaton, Manasa Gopal, Christopher Jones, Eric Kelley (the referee), Christopher Schwarz, Jinfei Sheng, Paul Tetlock, Sheridan Titman, and seminar participants at the 2021 Miami Behavioral Finance Conferences, 2021 Chapman Finance Conference, 2022 AFA Meetings, Oklahoma State University, the University of Missouri, and the University of Toronto.

References

Barardehi, Y.; Bernhardt, D.; Da, Z.; and Warachka, M.. “Internalized Retail Order Imbalances and Institutional Liquidity Demand.” Working Paper, available at https://ssrn.com/abstract=3966059 (2021).Google Scholar
Barber, B. M.; Huang, X.; Odean, T.; Jorion, P.; and Schwarz, C.. “A (Sub)Penny for Your Thoughts: Tracking Retail Investor Activity.” Working Paper, available at https://ssrn.com/abstract=4202874 (2022).CrossRefGoogle Scholar
Barber, B. M.; Huang, X.; Odean, T.; and Schwarz, C.. “Attention-Induced Trading and Returns: Evidence from Robinhood Users.” Journal of Finance, 77 (2022), 3141–3190.CrossRefGoogle Scholar
Barber, B. M.; Lee, Y. T.; Liu, Y. J.; and Odean, T.. “Just How Much Do Individual Investors Lose by Trading?” Review of Financial Studies, 22 (2009), 609–632.CrossRefGoogle Scholar
Barber, B. M.; Lin, S.; and Odean, T.. “Mediating Investor Attention.” Working Paper, University of California Berkeley (2021).Google Scholar
Barber, B. M., and Loeffler, D.. “The `Dartboard’ Column: Second-Hand Information and Price Pressure.” Journal of Financial and Quantitative Analysis, 28 (1993), 273–284.CrossRefGoogle Scholar
Barber, B. M., and Odean, T.. “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors.” Journal of Finance, 55 (2000), 773–806.CrossRefGoogle Scholar
Barber, B. M., and Odean, T.. “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” Quarterly Journal of Economics, 116 (2001), 261–292.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
Barber, B. M.; Odean, T.; and Zhu, N.. “Do Retail Trades Move Markets?” Review of Financial Studies, 22 (2008), 151–186.CrossRefGoogle Scholar
Barrot, J. N.; Kaniel, R.; and Sraer, D.. “Are Retail Traders Compensated for Providing Liquidity?” Journal of Financial Economics, 120 (2016), 146–168.CrossRefGoogle Scholar
Boehmer, E.; Jones, C. M.; Zhang, X.; and Zhang, X.. “Tracking Retail Investor Activity.” Journal of Finance, 76 (2021), 2249–2301.CrossRefGoogle Scholar
Bolster, P.; Trahan, E.; and Venkateswaran, A.. “How Mad Is Mad Money? Jim Cramer as a Stock Picker and Portfolio Manager.” Journal of Investing, 21 (2012), 27–39.CrossRefGoogle Scholar
Campbell, J. Y.; Ramadorai, T.; and Ranish, B.. “Do the Rich Get Richer in the Stock Market? Evidence from India.” American Economic Review: Insights, 1 (2019), 225–240.Google Scholar
Chen, G.; Kim, K. A.; Nofsinger, J. R.; and Rui, O. R.. “Trading Performance, Disposition Effect, Overconfidence, Representativeness Bias, and Experience of Emerging Market Investors.” Journal of Behavioral Decision Making, 20 (2007), 425–451.CrossRefGoogle Scholar
Da, Z.; Engelberg, J.; and Gao, P.. “In Search of Attention.” Journal of Finance, 66 (2011), 1461–1499.CrossRefGoogle Scholar
Da, Z.; Hua, J.; Hung, C. C.; and Peng, L.. “Market Returns and a Tale of Two Types of Attention.” Working Paper, available at https://ssrn.com/abstract=3551662 (2022).Google Scholar
Dorn, D.; Dorn, A.; and Sengmueller, P.. “Trading as Gambling.” Management Science, 61 (2015), 2376–2393.CrossRefGoogle Scholar
Dorn, D., and Sengmueller, P.. “Trading as Entertainment?” Management Science, 55 (2009), 591–603.CrossRefGoogle Scholar
Eaton, G. W.; Green, T. C.; Roseman, B.; and Wu, Y.. “Retail Trader Sophistication and Stock Market Quality: Evidence from Brokerage Outages.” Journal of Financial Economics, 146 (2022), 502–528.CrossRefGoogle Scholar
Engelberg, J.; Sasseville, C.; and Williams, J.. “Market Madness? The Case of Mad Money.” Management Science, 58 (2012), 351–364.CrossRefGoogle Scholar
Fong, K. Y.; Gallagher, D. R.; and Lee, A. D.. “Individual Investors and Broker Types.” Journal of Financial and Quantitative Analysis, 49 (2014), 431–451.CrossRefGoogle Scholar
Gao, X., and Lin, T.. “Do Individual Investors Treat Trading as a Fun and Exciting Gambling Activity? Evidence from Repeated Natural Experiments.” Review of Financial Studies, 28 (2015), 2128–2166.CrossRefGoogle Scholar
Gargano, A., and Rossi, A. G.. “Does It Pay to Pay Attention?” Review of Financial Studies, 31 (2018), 4595–4649.CrossRefGoogle Scholar
Glaser, M., and Weber, M.. “Overconfidence and Trading Volume.” Geneva Risk Insurance Review, 32 (2007), 1–36.CrossRefGoogle Scholar
Goetzmann, W. N., and Kumar, A.. “Equity Portfolio Diversification.” Review of Finance, 12 (2008), 433–463.CrossRefGoogle Scholar
Grinblatt, M., and Keloharju, M.. “The Investment Behavior and Performance of Various Investor Types: A Study of Finland’s Unique Data Set.” Journal of Financial Economics, 55 (2000), 43–67.CrossRefGoogle Scholar
Grinblatt, M., and Keloharju, M.. “Sensation Seeking, Overconfidence, and Trading Activity.” Journal of Finance, 64 (2009), 549–578.CrossRefGoogle Scholar
Grinblatt, M.; Keloharju, M.; and Linnainmaa, J. T.. “IQ, Trading Behavior, and Performance.” Journal of Financial Economics, 104 (2012), 339–362.CrossRefGoogle Scholar
Hong, H.; Jiang, W.; Wang, N.; and Zhao, B.. “Trading for Status.” Review of Financial Studies, 27 (2014), 3171–3212.CrossRefGoogle Scholar
Hvidkjaer, S. “Small Trades and the Cross-Section of Stock Returns.” Review of Financial Studies, 21 (2008), 1123–1151.CrossRefGoogle Scholar
Jones, C. M.; Shi, D.; Zhang, X.; and Zhang, X.. “Understanding Retail Investors: Evidence from China.” Working Paper, available at https://ssrn.com/abstract=3628809 (2020).Google Scholar
Kaniel, R.; Liu, S.; Saar, G.; and Titman, S.. “Individual Investor Trading and Return Patterns Around Earnings Announcements.” Journal of Finance, 67 (2012), 639–680.CrossRefGoogle Scholar
Kaniel, R.; Saar, G.; and Titman, S.. “Individual Investor Trading and Stock Returns.” Journal of Finance, 63 (2008), 273–310.CrossRefGoogle Scholar
Keasler, T. R., and McNeil, C. R.. “Mad Money Stock Recommendations: Market Reaction and Performance.” Journal of Economics and Finance, 34 (2010), 1–22.CrossRefGoogle Scholar
Kelley, E. K., and Tetlock, P. C.. “How Wise Are Crowds? Insights from Retail Orders and Stock Returns.” Journal of Finance, 68 (2013), 1229–1265.CrossRefGoogle Scholar
Kumar, A. “Who Gambles in the Stock Market?” Journal of Finance, 64 (2009), 1889–1933.CrossRefGoogle Scholar
Li, X.; Geng, Z.; Subrahmanyam, A.; and Yu, H.. “Do Wealthy Investors Have an Informational Advantage? Evidence Based on Account Classifications of Individual Investors.” Journal of Empirical Finance, 44 (2017), 1–18.CrossRefGoogle Scholar
Liang, B. “Price Pressure: Evidence from the `Dartboard’ Column.” Journal of Business, 72 (1999), 119–134.CrossRefGoogle Scholar
Linnainmaa, J. T. “Do Limit Orders Alter Inferences About Investor Performance and Behavior?” Journal of Finance, 65 (2010), 1473–1506.CrossRefGoogle Scholar
Luo, J., and Subrahmanyam, A.. “Asset Pricing When Trading is for Entertainment.” Review of Behavioral Finance, 11 (2019), 220–264.CrossRefGoogle Scholar
Odean, T. “Volume, Volatility, Price, and Profit When All Traders Are Above Average.” Journal of Finance, 53 (1998), 1887–1934.CrossRefGoogle Scholar
Odean, T. “Do Investors Trade Too Much?” American Economic Review, 89 (1999), 1279–1298.CrossRefGoogle Scholar
Statman, M.; Thorley, S.; and Vorkink, K.. “Investor Overconfidence and Trading Volume.” Review of Financial Studies, 19 (2006), 1531–1565.CrossRefGoogle Scholar
Tetlock, P. C. “All the News That’s Fit to Reprint: Do Investors React to Stale Information?” Review of Financial Studies, 24 (2011), 1481–1512.CrossRefGoogle Scholar
Welch, I. “The Wisdom of the Robinhood Crowd.” Journal of Finance, 77 (2022), 1489–1527.CrossRefGoogle Scholar
Supplementary material: File

Barber et al. supplementary material

Barber et al. supplementary material
Download Barber et al. supplementary material(File)
File 1.3 MB