Retail Traders and the Competitive Allocation of Attention

Posted: 1 Nov 2014 Last revised: 17 Aug 2015

See all articles by Shaun Davies

Shaun Davies

University of Colorado at Boulder - Leeds School of Business

Date Written: December 17, 2014

Abstract

I consider a rational expectations framework in which attention-constrained individuals compete against each other and institutions. The model reconciles a set of empirical facts that cannot be simultaneously explained by standard theories: retail trader portfolios are highly correlated, retail traders tend to follow some stocks and ignore others, and aggregate trades from retail traders are profitable over short-horizons and predict future returns (even controlling for past returns or past volume). Additionally, the equilibrium herding behavior of individuals suggests that their actions are not subsumed by institutions. Instead, the herd competes directly against institutions. The analysis also yields novel predictions regarding portfolio composition and turnover.

Keywords: Investor Attention, Rational Inattention, Retail Trade, Institutional Trade, Investor Coalitions

JEL Classification: G19, D70, G10, G14

Suggested Citation

Davies, Shaun, Retail Traders and the Competitive Allocation of Attention (December 17, 2014). Finance Down Under 2015 Building on the Best from the Cellars of Finance Paper. Available at SSRN: https://ssrn.com/abstract=2517062 or http://dx.doi.org/10.2139/ssrn.2517062

Shaun Davies (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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