Are Household Investors Noise Traders: Evidence from Belief Dispersion and Stock Trading Volume

48 Pages Posted: 18 May 2014

See all articles by Dan Li

Dan Li

Federal Reserve Board

Geng Li

Federal Reserve Board

Date Written: February 1, 2014

Abstract

We document a robust positive relationship between the belief dispersion about macroeconomic conditions among household investors and the stock market trading volume, using more than 30 years of household survey data and a novel approach to measuring belief dispersions. Notably, such a relationship prevails even after various series of professional analysts' belief dispersions are controlled for. Consistent with a causal effect, such a relationship is most pronounced for belief dispersion among individuals who are most likely to own stocks and for trading volume of stocks that are most visible to household investors. Finally, we present suggestive evidence that the dispersion of changes in belief is also positively associated with the stock trading volume. Our analysis implies that household investors, traditionally viewed as tending to trader randomly, likely possess and trade on information that is not available to professional investors.

Keywords: Belief dispersion, trading volume, household investors, surveys of consumers

JEL Classification: G12, G14, D82

Suggested Citation

Li, Dan and Li, Geng, Are Household Investors Noise Traders: Evidence from Belief Dispersion and Stock Trading Volume (February 1, 2014). FEDS Working Paper No. 2014-35. Available at SSRN: https://ssrn.com/abstract=2438025 or http://dx.doi.org/10.2139/ssrn.2438025

Dan Li

Federal Reserve Board ( email )

20th and C Streets, NW
Mail Stop 89
Washington, DC 20551
United States

Geng Li (Contact Author)

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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