Retail Trading and Momentum Profitability
85 Pages Posted: 30 Nov 2019
Date Written: November 14, 2019
Monthly momentum returns increase monotonically from low to high levels of retail trading with a 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
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