Who Chases Returns? Evidence from the Chinese Stock Market

Abstract

Using data on 18 million individual equity accounts, we study retail investors' return-chasing behavior. We construct a new measure for an individual's return chasing propensity (RCP). Less sophisticated investors tend to exhibit higher RCP. Investors with a one standard deviation higher RCP earn 5.6% lower yearly returns on average. At the stock level, we construct a measure for a stock's return chasing ownership (RCO) by wealth-weighting its retail holders' RCP. Stocks with the highest RCO suffer 10% lower yearly returns on average. Return chasing predicts both investor returns and stock returns more strongly than various other investor characteristics.

Keywords: return chasing, heterogeneity, retail investors, asset pricing

JEL Classification: G00, G1, G12