Individual Investors and Volatility
HEC Paris - Finance Department
David Alexandre Sraer
University of California, Berkeley; Princeton University
June 1, 2009
Journal of Finance, Forthcoming
AFA 2009 San Francisco Meetings Paper
We show that retail trading activity has a positive effect on the volatility of stock returns. To identify this effect, we use a reform of the French stock market that triggers a drop in retail trading activity by raising the relative cost of speculative trading for retail investors. The daily return volatility of the stocks affected by the reform falls by twenty basis points (a quarter of the sample standard deviation of the return volatility) relative to other stocks. For affected stocks, we also find a significant decrease in the magnitude of return reversals and the price impact of trades. We argue that these findings are consistent with the view that some retail investors behave as noise traders.
Number of Pages in PDF File: 75
Keywords: Idiosyncratic Volatility, Retail Trading, Noise Trading
JEL Classification: G14, G12, G11
Date posted: March 17, 2008 ; Last revised: March 13, 2013
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