Retail Investor Sentiment and Return Comovements

48 Pages Posted: 17 Feb 2004

See all articles by Alok Kumar

Alok Kumar

University of Miami - School of Business Administration

Charles M.C. Lee

Stanford University - Graduate School of Business

Date Written: May 2005

Abstract

Using a database of more than 1.85 million transactions made by retail investors over a six-year period (1991-96), we show that these trades are systematically correlated − i.e., individuals buy (or sell) stocks in concert. Moreover, as predicted by noise trader models, we find that systematic retail trading explains return comovements for stocks with high retail concentration (i.e., small-cap, value, lower institutional ownership, and lower-priced stocks), especially if these stocks are also costly to arbitrage. Macro-economic news and analyst earnings forecast revisions do not explain these results. Collectively, our findings support a role for investor sentiment in returns formation.

Keywords: Correlated trading, Retail sentiment, Habitat-based comovement, Arbitrage costs

JEL Classification: G12, G14

Suggested Citation

Kumar, Alok and Lee, Charles M.C., Retail Investor Sentiment and Return Comovements (May 2005). Available at SSRN: https://ssrn.com/abstract=502843 or http://dx.doi.org/10.2139/ssrn.502843

Alok Kumar (Contact Author)

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Charles M.C. Lee

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

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