Retail Investor Sentiment and Return Comovements
48 Pages Posted: 17 Feb 2004
Date Written: May 2005
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: Suggested Citation