Speculate Against Speculative Demand
39 Pages Posted: 3 Feb 2013 Last revised: 28 Jul 2013
Date Written: February 1, 2013
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: Suggested Citation