Do Retail Traders Destabilize Financial Markets? An Investigation Surrounding the COVID-19 Pandemic

43 Pages Posted: 9 Feb 2021 Last revised: 23 Feb 2021

See all articles by Ahmed S. Baig

Ahmed S. Baig

Saint Mary's College - Department of Business

Benjamin M. Blau

Utah State University - Huntsman School of Business

Hassan A. Butt

Missouri Southern State University - Plaster College of Business

Awaid Yasin

Lahore University of Management Sciences - Suleman Dawood School of Business

Date Written: February 9, 2021

Abstract

Economic theory suggests that speculative trading can lead to instability in financial markets. Using a novel dataset on retail trading activity in the US, this study extends the literature and investigates the impact of retail (speculative) trading on the volatility of the financial markets with a focus on the COVID-19 pandemic. Our tests are based on the retail trading data obtained from the discount brokerage Robinhood, a pioneer of commission free trading in the US, supplemented with data on odd lot trading obtained from the TAQ database. Using a series of econometric methods, we document a causal negative impact of speculative trading on the stability of the financial markets that was particularly enhanced during the pandemic. Our results are robust to a variety of time-series and panel tests, various multivariate estimation methodologies, corrections for endogeneity using quasi-natural experiments in a difference-in-difference setting, and the use of instrumental variable type regressions.

Keywords: COVID-19 Pandemic; Odd Lot Trading; Robinhood; Retail Trading; Speculative Trading; Volatility, Local Projections

JEL Classification: G10; G14; G18; H12

Suggested Citation

Baig, Ahmed and Blau, Benjamin M. and Butt, Hassan A. and Yasin, Awaid, Do Retail Traders Destabilize Financial Markets? An Investigation Surrounding the COVID-19 Pandemic (February 9, 2021). Available at SSRN: https://ssrn.com/abstract=3782159 or http://dx.doi.org/10.2139/ssrn.3782159

Ahmed Baig (Contact Author)

Saint Mary's College - Department of Business ( email )

Notre Dame, IN 46556
United States

Benjamin M. Blau

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

Hassan A. Butt

Missouri Southern State University - Plaster College of Business ( email )

3950 E. Newman Road
Joplin, MO 64801
United States

Awaid Yasin

Lahore University of Management Sciences - Suleman Dawood School of Business ( email )

D.H.A, Lahore Cantt
Lahore, Punjab 54792
Pakistan

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