The Equity Market Implications of the Retail Investment Boom
56 Pages Posted: 2 Feb 2021 Last revised: 24 Mar 2021
Date Written: January 30, 2021
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
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