Retail Trading and Momentum Profitability

Abstract

Monthly momentum returns increase monotonically across quintile portfolios of stocks sorted by retail trading participation with a top-minus-bottom spread of 1.42% (t-statistics = 3.46). Stocks that are heavily traded by retail investors exhibit lottery-like features such as low prices, high idiosyncratic volatilities/skewness, and high past maximum returns. Using lottery characteristics to proxy for the extent of retail trading, future momentum profits monotonically increase in the cross-sectional lotteryness of stocks over a 77-year back-testing period for which retail trading data is unavailable. Further analysis shows that lottery-like stocks exhibit stronger comovements that amplify momentum profits.

Keywords: Retail trading, momentum, lottery-like stocks

JEL Classification: G11, G12, G14, G40