Flattening the Illiquidity Curve: Retail Trading During the COVID-19 Lockdown

Abstract

This paper studies the impact of retail investors on stock liquidity during the Coronavirus pandemic lockdown in Spring 2020. Retail trading exhibits a sharp increase, especially among stocks with high COVID-19-related media coverage. Retail trading attenuated the rise in illiquidity by roughly 40%, but less so for high-media-attention stocks. Causality is addressed utilizing the staggered implementation of stay-at-home advisory across US states. The results highlight that access to financial markets facilitated by fintech innovations to trading platforms, along with ample free time, are significant determinants of retail-investor stock-market participation.

Keywords: Illiquidity curve, COVID-19, retail investors, fintech, media attention

JEL Classification: G12, G14