Swimming Against the Current: Contrarian Retail Trading

Abstract

On average, retail investors tend to sell stocks after high recent returns. While research suggests that such contrarian behavior is a silver lining of retail trading, we show that it only applies to positions with unrealized capital gains and reverses for loser stocks. The salience of portfolio positions as well as take-gain and stop-loss trading produce this systematic variation in contrarian selling. We examine the effects of this trading behavior on asset prices and provide evidence that conditional contrarian selling impacts short-term return reversals and stock return volatility. Using stock splits as a natural experiment, we provide evidence in support of a causal interpretation of our findings.

Keywords: Individual Investors, Contrarian Behavior, Liquidity Provision, Stock Market Volatility, Short-Term Reversals

JEL Classification: G12