Speculate Against Speculative Demand

39 Pages Posted: 3 Feb 2013 Last revised: 28 Jul 2013

See all articles by Owain Ap Gwilym

Owain Ap Gwilym

Bangor Business School

Arben Kita

Southampton Institute - Southampton Business School

Qingwei Wang

Cardiff University - Cardiff Business School; ZEW – Leibniz Centre for European Economic Research

Date Written: February 1, 2013

Abstract

We construct a measure of individual investors' speculative demand for stocks from their online queries on penny stocks provided by Google Search volume index (hereafter "SVI"). We examine how it affects the return dynamics of U.S. stock indices. We find that the speculative demand leads to a short-term return reversal. We build a simple trading strategy that sells a stock index when SVI is high and buys the stock index otherwise. It generates annual excess returns of up to 20% over the buy-and-hold strategy. Applying the trading strategy to the corresponding ETFs and index futures yields similar results. Transaction costs and liquidity risk can partially explain the excess returns. Strong time variation of the excess returns imposes additional limits to arbitrage.

Keywords: Investor Attention, Speculative Demand, Penny Stocks, Market Returns, Trading Strategy, Limits to Arbitrage

JEL Classification: G02; G12; G14

Suggested Citation

ap Gwilym, Owain and Kita, Arben and Wang, Qingwei, Speculate Against Speculative Demand (February 1, 2013). Available at SSRN: https://ssrn.com/abstract=2210526 or http://dx.doi.org/10.2139/ssrn.2210526

Owain Ap Gwilym

Bangor Business School ( email )

Bangor Business School
College Road
Gwynedd LL57 2DG, Wales LL57 2DG
United Kingdom

HOME PAGE: http://www.bangor.ac.uk/business/staff/owain_ap_gwilym.php.en

Arben Kita

Southampton Institute - Southampton Business School ( email )

East Park Terrace
Southampton, Hampshire SO14 0RH
United Kingdom

Qingwei Wang (Contact Author)

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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