Resolving a Paradox: Retail Trades Positively Predict Returns but are Not Profitable

45 Pages Posted: 18 Feb 2021 Last revised: 6 Jun 2022

See all articles by Brad M. Barber

Brad M. Barber

University of California, Davis

Shengle Lin

San Francisco State University - Department of Finance

Terrance Odean

University of California, Berkeley - Haas School of Business

Date Written: June 3, 2022

Abstract

Retail order imbalance positively predicts returns, but in aggregate retail investor trades lose money. Why? Order imbalance tests equally weight stocks, but retail purchases concentrate in stocks that subsequently underperform. Long-short strategies based on extreme quintiles of retail order imbalance earn annualized returns of -15.3% among stocks with heavy retail trading but earn 6.76% among other stocks. Our results reconcile the literatures on the performance of retail investors, the predictive content of retail order imbalance, and attention-induced trading and returns. We also find evidence that trades by retail investors with less knowledge, experience, and wealth are more likely to underperform.

Keywords: Individual Investors, Attention, Retail Trading, Return Predictability, Order Imbalance

JEL Classification: G11, G12, G14, G40, G41

Suggested Citation

Barber, Brad M. and Lin, Shengle and Odean, Terrance, Resolving a Paradox: Retail Trades Positively Predict Returns but are Not Profitable (June 3, 2022). Available at SSRN: https://ssrn.com/abstract=3783492 or http://dx.doi.org/10.2139/ssrn.3783492

Brad M. Barber (Contact Author)

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Shengle Lin

San Francisco State University - Department of Finance ( email )

1600 Holloway Avenue
San Francisco, CA 94132-1722
United States

Terrance Odean

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-6767 (Phone)
510-666-2561 (Fax)

HOME PAGE: http://www.haas.berkeley.edu/faculty/odean.html

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