Speculative Retail Trading and Asset Prices
University of Toronto, Rotman School of Management
University of Miami - School of Business Administration
November 10, 2011
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
This paper examines the characteristics and pricing of stocks that are actively traded by speculative retail investors. We find that stocks with high "retail trading proportion" (RTP) have strong lottery features and they attract retail investors who are known to exhibit a strong propensity to gamble with stocks. High levels of RTP also reflect active trading by risk-seeking "realization utility" investors. Stocks whose trading are dominated by speculative retail investors tend to be overpriced and earn significantly negative alpha. The average return difference between the top and the bottom RTP quintiles is about -0.60% per month. This negative RTP premium is stronger among stocks that have lottery features or are located in regions in which people exhibit a stronger propensity to gamble. Collectively, these results indicate that speculative retail trading importantly affect stock prices.
Number of Pages in PDF File: 52
Date posted: April 2, 2009 ; Last revised: April 20, 2012