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

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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: February 10, 2021

Abstract

In the US, retail order imbalance positively correlates with returns in the days following trades, however, in aggregate, retail investors lose money by trading. These two facts coexist because order imbalance tests ignore losses on the day of trade and because retail purchases are concentrated in stocks that earn large negative abnormal returns. Additionally, small retail trades, which are favored by retail investors with less knowledge, experience, and wealth, underperform large trades. Our results reconcile the literatures on the performance of retail investors, the predictive content of retail order imbalance, and attention-induced trading and returns.

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 (February 10, 2021). Available at SSRN: https://ssrn.com/abstract=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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