The Equity Market Implications of the Retail Investment Boom

56 Pages Posted: 2 Feb 2021 Last revised: 24 Mar 2021

See all articles by Philippe van der Beck

Philippe van der Beck

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Coralie Jaunin

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Swiss Finance Institute

Date Written: January 30, 2021

Abstract

Retail trading activity has soared during the COVID-19 pandemic. This paper quantifies the impact of the retail investment boom on the US stock market within a structural model. Using account holdings data from the online trading platform “Robinhood Markets Inc.” and 13F filings, we estimate retail and institutional demand curves and derive aggregate pricing implications via market clearing. The inelastic nature of institutional demand allows Robinhood investors to have a substantial effect on stock returns during the COVID-19 pandemic. Despite their negligible market share of 0.2%, we find that Robinhood traders account for 10% of the cross-sectional variation in stock returns during the second quarter of 2020. We furthermore estimate that without the surge in retail trading activity the aggregate market capitalization of the smallest quintile of US stocks would have been over 20% lower. Lastly, Robinhood traders significantly impact the price of some large individual companies that are being held primarily by passive institutional investors.

Keywords: Retail investors, Demand system, Institutional investors, COVID-19, Robinhood

JEL Classification: G11, G14, G12, G23

Suggested Citation

van der Beck, Philippe and Jaunin, Coralie, The Equity Market Implications of the Retail Investment Boom (January 30, 2021). Swiss Finance Institute Research Paper No. 21-12, Available at SSRN: https://ssrn.com/abstract=3776421 or http://dx.doi.org/10.2139/ssrn.3776421

Philippe Van der Beck (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Coralie Jaunin

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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