Understanding Retail Investors: Evidence from China

66 Pages Posted: 9 Jul 2020 Last revised: 7 Oct 2021

See all articles by Charles M. Jones

Charles M. Jones

Columbia University

Donghui Shi

Shanghai Stock Exchange

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

Xinran Zhang

Central University of Finance and Economics (CUFE) - School of Finance

Date Written: June 15, 2020

Abstract

Using comprehensive account-level data from 2016 to 2019, we examine retail investor trading behavior in the Chinese stock market. We separate millions of retail investors into five groups by their account sizes and document strong heterogeneity in their trading dynamics and performance. Retail investors with smaller account sizes cannot predict future price movements correctly, in the sense that they buy future losers and sell future winners. These investors fail to process public news and display behavioral biases such as overconfidence and gambling preferences. In sharp contrast, retail investors with larger account balances predict future returns correctly, incorporate public news in their trading, and gain more in stocks which are more attractive to investors with behavioral biases. For liquidity provision, the smaller retail investors follow daily momentum strategies, demanding immediate liquidity, while they become contrarian over weekly horizons, and they contribute positively towards firm-level liquidity. On the contrary, larger retail investors ae contrarian at daily horizons, providing immediate liquidity, but their potentially informed trades demand liquidity over longer terms.

Keywords: Retail investors, Chinese stock market, return predictability, liquidity, information content

JEL Classification: G12, G14, G15

Suggested Citation

Jones, Charles M. and Shi, Donghui and Zhang, Xiaoyan and Zhang, Xinran, Understanding Retail Investors: Evidence from China (June 15, 2020). Available at SSRN: https://ssrn.com/abstract=3628809 or http://dx.doi.org/10.2139/ssrn.3628809

Charles M. Jones

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Donghui Shi

Shanghai Stock Exchange ( email )

Shanghai 200120
China

Xiaoyan Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Xinran Zhang (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

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