Retail Investors’ Contrarian Behavior Around News and the Momentum Effect

53 Pages Posted: 5 Apr 2020 Last revised: 3 Dec 2020

See all articles by Cheng Luo

Cheng Luo

affiliation not provided to SSRN

Enrichetta Ravina

Federal Reserve Bank of Chicago; Center for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Marco Sammon

Kellogg School of Management - Department of Finance

Luis M. Viceira

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Date Written: November 22, 2020

Abstract

We study the role of retail investors in the gradual diffusion of information in financial markets. We show that retail investors tend to trade as contrarians after large earnings surprises, and such contrarian trading contributes to sluggish price adjustment and to momentum. Retail traders are particularly active for small loser stocks. As a robustness check, we double sort stocks in quintiles based on momentum and the strength of retail contrarian trading, and find that the momentum phenomenon arises only in the 4th and 5th quintile of contrarian trading intensity. We further investigate the timing and the horizon of the traders, the role of segmentation in stock ownership, and the role of attention and browsing behavior in generating contrarian trading. Alternative hypotheses, such as the disposition effect, and stale limit orders, do not explain the phenomenon.

Keywords: Retail Investors; Momentum; Earnings Surprises

JEL Classification: G02; G11; G14

Suggested Citation

Luo, Cheng and Ravina, Enrichetta and Sammon, Marco and Viceira, Luis M., Retail Investors’ Contrarian Behavior Around News and the Momentum Effect (November 22, 2020). Available at SSRN: https://ssrn.com/abstract=3544949 or http://dx.doi.org/10.2139/ssrn.3544949

Cheng Luo

affiliation not provided to SSRN

Enrichetta Ravina (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://https://sites.google.com/view/eravina/research

Center for Economic Policy Research (CEPR) ( email )

33 Great Sutton Street
London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
Brussels
Belgium

Marco Sammon

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://marcosammon.com/

Luis M. Viceira

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6331 (Phone)
617-496-6592 (Fax)

HOME PAGE: http://www.people.hbs.edu/lviceira

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
402
Abstract Views
2,087
rank
89,349
PlumX Metrics