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Attention Induced Trading and Returns: Evidence from Robinhood Users
... However, when it comes to financial products, the relationship between being recommended and higher sales is not obvious. Historical returns do not reliably predict future returns, so rational investors should not treat historical performance as a reliable quality signal when purchasing financial products (Kahn and Rudd 1995, Clifford et al. 2021, Barber et al. 2022. While recommender systems affect consumer behaviors and increase consumer goods sales by providing a reliable quality signal, it is unclear whether recommender systems based on an unreliable quality signal in the context of financial products shape investors' behaviors and enhance product sales. ...
... Such consensus is not the case for financial products, because investors with varying knowledge and experience establish dramatically different evaluations of quality signals, such as historical returns (Havakhor et al. 2021). For example, unsophisticated investors often chase financial products with high historical returns and tend to suffer losses due to their trend chasing (Barber et al. 2022). With this study, we investigate specifically whether unsophisticated investors might be more likely to adopt an online investment platform's recommendations, as well as whether they suffer diminished outcomes after purchasing the recommended products. ...
... Another relevant work is Barber et al. (2022) that establishes how the Robinhood app's unique "Top Mover" list drives investors to herd and buy attention-grabbing stocks. As the "Top Mover" list displays stocks with high price fluctuations, it sends a different signal from the recommender systems in our study which is based on historical return. ...
Despite the widespread adoption of recommender systems by online investment platforms, empirical research into their impact on online investors' behaviors is scarce. Using data from a global e-commerce platform, the authors of this study adopt a regression discontinuity design to causally examine the effects of recommender systems on online investor behaviors, specifically in a mutual fund investment context. The results show that funds featured by recommender systems prompt significantly more purchases. This effect is especially salient among unsophisticated investors, who appear more likely to follow system-provided recommendations. Further analysis also reveals that these investors tend to suffer significantly worse investment performance after purchasing the recommended funds. Thus, recommender systems threaten to amplify wealth inequality among investors in financial markets.
... As pointed out by Barber et al. (2022), Eaton et al. (2021), and Peress and Schmidt (2020), events that disrupt and disrupt stock trading but are not related to company characteristics can have a significant impact on stock trading activity and the level of liquidity. Our paper aims to examine a similar phenomenon by studying the influence of protest-induced disruptions in the heart of Indonesia's business centers on the trading activity of Indonesian stocks of Indonesian stock exchange-listed companies. ...
... However, as shown by Baker et al. The results of this study are in accordance with Barber et al. (2022), Eaton et al. (2021), and Peress and Schmidt (2020) while also complementing (Acemoglu et al., 2018) our understanding of the impact of protests on the stock market. In particular, Peress and Schmidt (2020) highlight that disturbing or "sensational" news events are associated with lower trading activity. ...
... Then for comparisons between demonstration events, it was found that price increase demonstration events had the highest impact on abnormal returns compared to other demonstration events. In addition, our paper contributes to the financial literature by documenting the comparative effects of demonstration action on stock trading (e.g., Barber et al. (2022), Eaton et al. (2021), and Peress and Schmidt (2020)). Capital market players can consider the results of this study in paying attention to investing in stocks using technical analysis. ...
This study aims to analyse the effect of demonstration events on abnormal returns. The literature shows that demonstration events have information content that can influence investors in the capital market. Therefore, investors in the capital market will react after the information is received. Demonstration events are risks closely related to negative signals influencing investors’ decisions in the capital market. The country’s situation, which was currently in turmoil due to continuous and chaotic demonstrations, greatly affected the state of the country’s economy. The research sample is a company listed on the Indonesian stock exchange. The analysis results show that the days around the date of the demonstration against the Job Creation Law affect abnormal returns. Furthermore, the results of a comparative analysis between demonstration events show that demonstrations highlighting the scarcity of cooking oil and rising cooking oil prices, rising fuel prices, and increasing VAT rates at almost the same time have the highest impact on abnormal returns compared to other demonstration events. This study expands the literature on capital markets by analysing the influence of demonstration events that have broad social and economic impacts on abnormal returns in capital markets in developing countries.
... However, when it comes to financial products, the relationship between being recommended and higher sales is not obvious. Historical returns do not reliably predict future returns, and rational investors should not treat historical performance as a reliable quality signal (Kahn and Rudd 1995, Barber et al. 2022, Clifford et al. 2021. Thus, it is unclear whether recommender systems based on an unreliable quality signal shape investors' behaviors and enhance product sales. ...
... Such consensus is not the case for financial products, because investors with varying knowledge and experience establish dramatically different evaluations of quality signals, such as historical returns (Havakhor et al. 2021). For example, unso-phisticated investors often chase financial products with high historical returns and tend to suffer losses due to their trend chasing (Barber et al. 2022). With this study, we investigate specifically whether unsophisticated investors might be more likely to adopt an online investment platform's recommendations, as well as whether they suffer diminished outcomes after purchasing the recommended products. ...
... Notably, our work shares some features with an effort by Barber et al. (2022) to establish how the Robinhood app's unique "Top Mover" list drives investors to herd and buy attention-grabbing stocks. Such intense buying by Robinhood users can lead to negative returns. ...
Despite the widespread adoption of recommender systems by online investment platforms, empirical research into their impact on online investors’ behaviors is scarce. Using data from a global e-commerce platform, the authors of this study adopt a regression discontinuity design and causally examine the effects of recommender systems on online investor behaviors, specifically in a mutual fund investment context. The results show that funds featured by recommender systems prompt significantly more purchases. This effect is especially salient among unsophisticated investors, who appear more likely to follow system-provided recommendations. Further analysis also reveals that these investors tend to realize significantly worse performance after purchasing the recommended funds. Thus, recommender systems threaten to amplify wealth inequality among investors in financial markets.
... Pioneering studies by Barber and Odean (2002) and Choi et al. (2002) suggest the latter: In the 1990s, individuals that adopted online stock trading platforms increased their trading activity and trading costs without any apparent increase in risk-adjusted returns. More recently, social media usage appears, at best, to have mixed effects on the quality of financial decisions (e.g., Hirshleifer et al. (2021), Barber et al. (2021), and Allen et al. (2022)). ...
... Our paper is primarily related to a literature on how internet use affects the portfolio choices of individual investors (e.g., Barber and Odean (2002); Choi et al. (2002); Hirshleifer et al. (2021); Barber et al. (2021); Allen et al. (2022)). For example, Barber and Odean (2002) and Barber et al. (2021) find evidence of excessive stock trading among adopters of online trading platforms, and Allen et al. (2022) document herding and speculation among users of Twitter, Stocktwits, and Reddit's "wallstreetbets" stock forum. ...
... Our paper is primarily related to a literature on how internet use affects the portfolio choices of individual investors (e.g., Barber and Odean (2002); Choi et al. (2002); Hirshleifer et al. (2021); Barber et al. (2021); Allen et al. (2022)). For example, Barber and Odean (2002) and Barber et al. (2021) find evidence of excessive stock trading among adopters of online trading platforms, and Allen et al. (2022) document herding and speculation among users of Twitter, Stocktwits, and Reddit's "wallstreetbets" stock forum. ...
... Moreover, I show that mandatory fund disclosures can mitigate the overreaction induced by voluntary summary disclosures. My findings extend the recent literature on the role of salient disclosures in triggering attention-induced trade and subsequent underperformance (Rennekamp 2012;Bushee et al. 2020;Barber et al. 2022) and align with the findings of Guay et al. (2016) by highlighting the complementary role of voluntary and mandatory disclosures in jointly improving the information environment. ...
... This study extends the prior literature by examining the dissemination of summary disclosures in a unique retail-oriented mutual fund setting. By showing the negative investment consequences of overreliance on factsheets for retail investors, I contribute to the growing literature on the role of salient disclosures in triggering attention-induced trade and subsequent underperformance (Rennekamp 2012;Bushee et al. 2020;Barber et al. 2022). At the same time, I find that mandatory disclosures may play a complementary role in mitigating the negative consequences of attention-driven trading. ...
Mutual funds regularly issue factsheets to communicate their performance in a short summary form. I investigate whether the release of factsheets in Morningstar plays a role in the trading behavior of retail investors. I find that retail investors react more to performance measures in factsheets when these are disseminated through Morningstar, and therefore made salient, than when they are not. The results cannot be explained by dissemination via alternative platforms, fund advertising, marketing by financial intermediaries, funds’ anticipation of investor reaction, or selective reporting of performance measures. Additional analysis suggests that factsheets do not help improve retail investors’ investment allocation decisions; if anything, I find some evidence consistent with overreaction to performance measures disseminated via factsheets, while mandatory fund disclosures tend to mitigate this overreaction. Taken together, these findings contribute to a more nuanced understanding of summary disclosures by highlighting the unintended consequence of investor overreaction.
... Unlike institutional investors, retail investors often trade in small quantity and face relatively high transaction costs, such as commission or service fees paid to the brokerage [1,2] . The advent of fintech brokerage firms has ushered in a new era for retail investors, significantly lowering the barriers to entry and altering the traditional brokerage operation model [3] . These Fintech brokerages use tools such as algorithmic trading, artificial intelligence, stock inventory management, Apps construction, and fractional trading to reduce the transaction costs for individual clients. ...
... These Fintech brokerages use tools such as algorithmic trading, artificial intelligence, stock inventory management, Apps construction, and fractional trading to reduce the transaction costs for individual clients. For instance, Barber et al., studies such a Fintech brokerage named Robinhood [3] . By offering zero-commission trades and user-friendly interfaces, Robinhood has democratized stock market access and attracts a large volume of inexperienced investors. ...
Recent advancements in financial technology (fintech) brokerage and social media have significantly transformed the landscape for retail investors, as exemplified by the GameStop short squeeze event. This phenomenon highlighted how the combination of low or zero transaction costs and widespread information sharing on social media platforms can empower individual investors to collectively challenge established market players like short sellers. This paper delves into the study of how fintech brokerage services, social media engagement, and coordinated actions by retail investors interplay to reshape the trading environment. By examining relevant literature, the study aims to shed light on the nuanced effects of technological advancements on the trading dynamics of retail investors. In further discusses, three critical implications touch upon the need for further empirical research in areas such as market efficiency, the roles of market participants, conflicts between profits and responsibilities (for security service providers and social media), regulation adjustments, and information transparency. This exploration contributes to a deeper understanding of the evolving market landscape influenced by technological progress and different market players.
... More recent evidence (Kaniel et al. 2008, Kelley andTetlock 2013) suggests that retail order flow may be a predictor of future stock returns; aggressive trades can predict future news, whereas passive orders are contrarian and provide liquidity. Barber et al. (2022) show that the design of the Robinhood trading app (in particular, the Top Movers tab) steers investors' attention to stocks with extreme returns, leading to portfolio underperformance. At the same time, Welch (2022) documents that, in aggregate, retail investors using the Robinhood app performed well between 2018 and 2020. ...
... Arnold et al. (2022) find that push notifications from brokerages incentivize investors to take more risks and increase their leverage. Barber et al. (2022) show that Robinhood traders engage in more attention-induced trading than peer retail investors. ...
We study the effect of gamification on retail traders’ behavior using a randomized online experiment. Participants with lower financial literacy prefer platforms with hedonic gamification elements, such as confetti and achievement badges. On average, hedonic gamification increases trading volume by 5.17%. However, the difference in trading activity between gamified and nongamified platforms is driven primarily by self-selection (70%) rather than gamification (30%). Participants who prefer hedonic gamification exhibit noisy trading strategies, whereas those favoring nongamified platforms display stronger contrarian behavior. Further, price trend notifications enhance learning for investors with accurate beliefs, but they reinforce trading mistakes for those with incorrect beliefs.
This paper has been This paper was accepted by Jean-Edouard Colliard for the special issue on the human-algorithm connection.
Funding: P. Chapkovski acknowledges funding from the Deutsche Forschungsgemeinschaft [Germany’s Excellence Strategy—EXC 2126/1-390838866]. M. Khapko and M. Zoican acknowledge the Social Sciences and Humanities Research Council of Canada [Insight Development Grant 430-2018-00125] and the Canadian Securities Institute Research Foundation [research grant]. M. Zoican acknowledges financial support from the Quantitative Management Research Initiative (QMI) under the aegis of the Fondation du Risque, a joint initiative by Université Paris-Dauphine, l’École Nationale de la Statistique et de l’Administration ParisTech, and LFIS, France.
Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.02650 .
... Moreover, the investor clientele of specialized ETFs has a greater fraction of retail investors, who are typically considered less sophisticated and, therefore, more prone to holding incorrect beliefs and engaging in positive feedback trading (De Long et al. 1990b). Relatedly, specialized ETFs are very popular among Robinhood investors, who have become famous in recent years for being prone to investment frenzies (Barber et al. 2022). ...
... Panel B of Figure 10 shows that the number of Robinhood users scaled by ETF market capitalization is substantially higher for specialized ETFs than for broad-based ETFs in their first year of existence. This result is consistent with the observations of Barber et al. (2022) and Welch (2022) that Robinhood investors hold attention-grabbing securities. The authors show that Robinhood traders experience negative returns shortly after they open their positions. ...
The interplay between investors’ demand and providers’ incentives has shaped the evolution of exchange-traded funds (ETFs). While early ETFs invested in broad-based indexes and therefore offered diversification at low cost, more recent products track niche portfolios and charge high fees. Strikingly, over their first 5 years, specialized ETFs lose about 30% (risk-adjusted). This underperformance cannot be explained by high fees or hedging demand. Rather, it is driven by the overvaluation of the underlying stocks at the time of the launch. Our results are consistent with providers catering to investors’ extrapolative beliefs by issuing specialized ETFs that track attention-grabbing themes.
... The results add to the discussion on the suitability of ESG ratings in their use, especially for the purpose of examining individual retail investors' preferences and the extent of these preferences. Our study also complements the literature which explores market reactions to different phases of the COVID-19 pandemic (Döttling and Kim, 2022), as well as research using the Robinhood data set (Barber et al., 2022;Ozik et al., 2021;Welch, 2022). ...
We investigate retail investors' movement towards/from securities with different environmental, social and governance scores during COVID-19 pandemic using data from Robinhood. We find that COVID reduces the number of retail investors holding securities with low environmental scores, but not those with high scores. We also find heterogeneity in investors' reactions to different subcategory scores. The equal-weighted buy-and-hold portfolio of high-score securities does not outperform that of low-score securities in terms of volatility or return, suggesting retail investors' preference for high environmental score securities is not driven by financial return or risk, and such 'voting' is independent from pecuniary indicators.
... There is a large literature examining fintech and financial innovation, covering the impact on stock (Barber et al., 2022), the role of expanding the supply of financial services (Erel & Liebersohn, 2022), the impact on financial inclusion (Parlour et al., 2022), etc. With the advent of digital technologies, banking industry has witnessed a paradigm shift in recent years. ...
... Our paper contributes to this literature by demonstrating that social interactions are associated with persistent disagreement following the release of public news and by providing a unified explanation for the sharply contrasting dynamics of return and volume responses to earnings announcements Our paper also contributes to the literature on investor attention. Previous studies have analyzed the determinants of attention (Kahneman 1973, Fiske and Taylor 1991, Gabaix and Laibson 2005, Hirshleifer, Lim, and Teoh 2009, DellaVigna and Pollet 2009, the rational allocation of attention (Sims 2003, Peng 2005, Peng and Xiong 2006, Kacperczyk, Nieuwerburgh, and Veldkamp 2014, 2016, and the consequences of limited attention (Klibanoff, Lamont, and Wizman 1998, Hirshleifer and Teoh 2003, Barber et al. 2022. Our findings indicate that attention is socially transmitted and that this affects investor and market responses to earnings announcements. ...
... Eaton et al. (2022) use outages in Robinhood as a negative exogenous shock to retail participation and show that outages lead to a reduction in volatility and an improvement in liquidity of affected stocks. Barber et al. (2021) find that retail traders engage in attentioninduced trading, which can lead to buy-side herding events. Consistent with these studies, our findings show that the effect of retail trading on market volatility is stronger during periods of crises, like the COVID-19 pandemic and the financial crisis. ...
Existing research suggests that retail trading is associated with volatility in financial markets. To extend the literature, we study the dynamic effects of retail trading on volatility during the COVID-19 pandemic. Using marketable retail trades identified from the Boehmer et al. (2021) algorithm and novel empirical methods discussed in Jordá (2005), we document a negative, persistent impact of retail trading on the stability of stock prices that is particularly stronger during the pandemic than during the pre-pandemic period. These results highlight how periods of crises - like the pandemic - affect the destabilizing influence of retail trading. To provide additional evidence, we replicate our empirical exercise during the 2008-09 financial crisis. Consistent with the COVID-19 period, we again find that retail trading leads to more volatility during the financial crisis vis-á-vis the pre-crisis period. These results again support the idea that periods of crises strengthen the link between retail trading and volatility.
... A new breed of retail investors, who take advantage of zero-commission trading platforms like Robinhood, has lately been the focus of attention. Robinhood investors have been shown to outperform the market, increase their need for liquidity, and increase their attention-induced trading [13]. Another research demonstrates that retail investor order flows are persistent [14]. ...
Overconfidence is a common psychological condition defined as the irrational belief that one's chances of success are higher than they really are. The damage that overconfidence can do in the world of finance is even more glaring. Small and medium-sized investors lack the information collection, professional skills, and trend-following behaviour of large shareholders, firm management, and institutional investors. In China, the stock market is dominated by small and retail investors. They lack information and often make a decision based on the limited knowledge and information that they have. Still, owing to hubris, many small and medium-sized investors falsely assume that making money is simple or that they can consistently outperform the market as a whole. Small and medium-sized investors frequently trade to provide liquidity to the market, but their overconfidence often leads them to set unrealistically high-profit targets, incorrectly attribute gains to their operating skills, and fail to adequately account for losses as a result of events outside their control. Transaction costs can eat into earnings. Overconfidence among investors has been shown to increase market risk and volatility.
... Over half of the adopters fall within the 25 to 35 age range. 6 The mean wealth for the BangNiTou adopters is RMB 67,665 ($10,572), which is substantially lower than the $588,246 mean wealth of Vanguard's PAS adopters. The adopters' median invested wealth is RMB 24,272 ($3,792), also considerably lower than the median invested wealth for Vanguard's PAS adopters ($282,450). ...
This study examines the impact of robo-advising on personal wealth management based on a unique data set of individual investors’ investment accounts. Robo-advising portfolios have better performance, measured as lower volatility and a higher Sharpe ratio, than investors’ self-directed portfolios. More importantly, we find evidence that robo-advising has a spillover effect on its adopters: it improves their financial sophistication. Investors have more diversified portfolios and exhibit fewer behavioral biases in portfolio management and fund choices in their self-directed accounts after adopting robo-advising. We use whether investors are exposed to the robo-advisor advertising as the instrumental variable for identification, and our findings still hold in the instrumental variable estimation. The spillover effect is more prominent for adopters who interact with the service more actively and who were less rational before adopting the app. We also find that adopters learn from the robo-advisor by simply imitating its portfolios or strategies. These findings indicate that robo-advising effectively plays a role in educating investors through repeated interactions with its adopters and setting investment models that are easy to follow. Collectively, this study not only solidifies the fact that robo-advising improves investors’ investment performance but also provides large-sample, non-laboratory evidence that robo-advising can serve as a financial education tool that improves investor sophistication.
... For example, Eaton et al. (2021) found that Robinhood investors are similar to uninformed noise traders who reduce market liquidity and increase return volatility. Barber et al. (2020) showed that such investors engage in attention-driven trading and constitute one-third of all retail trading volume in the 50 most popular Robinhood stocks and one-fourth of all retail trading volume in high attention stocks. In related research, Ozik et al. (2021) found that trading by Robinhood investors significantly increases in stocks with high pandemic-related media coverage, whereas Liaukonyte and Zaldokas (2020) indicated that television advertising can affect the trading behaviors of Robinhood investors. ...
Using the data of retail investors' stock holdings, this study examined the effect of corporate misconduct on investor behavior. Our results showed that the number of retail investors investing in fraudulent firms tends to increase throughout the misconduct and during the public announcement. We also found that the increased volatility of stock returns heightens the interest of retail investors in the fraudulent stocks before and during the announcement of corporate misconduct. However, there was no significant change in their number after the announcement. Retail investors did not sell fraudulent stocks that have already lost significant value after the public announcement of corporate misconduct.
... However, the lack of verification and informality of social media raises concerns about the credibility of its information and whether investors are encouraged to ignore information in favor of emotions (e.g., Campbell et al. 2022). In the last few years, commission-free trading and the game-like style of Robinhood's mobile app encouraged frequent trading by individuals with little or no financial experience and spurred a flurry of studies examining how retail investors trade in the modern era and if they affect aggregate market behavior (e.g., Barber et al. 2022, Eaton et al. 2022). ...
Investors are central to the incorporation of firm information in capital markets, yet it is challenging to observe the particular information they use and struggle with. Lee and Zhong (2022) use online investor interactions with Chinese public firms to document evidence that investors face significant processing costs. They find that when investor interactions occur, capital markets behave as if the information environment has improved, with increased trading activity, liquidity, and timely pricing of the quarter’s earnings in returns. My discussion highlights the contributions of Lee and Zhong’s findings to the processing cost, retail investor, and investor interactions literatures. I also describe empirical challenges faced by this and similar studies. I encourage using the details of interactions to disentangle the nature of processing costs and to increase support for causal conclusions more generally. Finally, I note several topics related to investor interaction that would benefit from further research.
... Eaton et al. (2022) use outages in Robinhood as a negative exogenous shock to retail participation and show that outages lead to a reduction in volatility and an improvement in liquidity of affected stocks. Barber et al. (2021) find that retail traders engage in attentioninduced trading, which can lead to buy-side herding events. Consistent with these studies, our findings show that the effect of retail trading on market volatility is stronger during periods of crises, like the COVID-19 pandemic and the financial crisis. ...
Existing research suggests that retail trading is associated with volatility in financial markets. To extend the literature, we study the dynamic effects of retail trading on volatility during the COVID-19 pandemic. Using marketable retail trades identified from the Boehmer et al. (2021) algorithm and novel empirical methods discussed in Jordá (2005), we document a negative, persistent impact of retail trading on the stability of stock prices that is particularly stronger during the pandemic than during the pre-pandemic period. These results highlight how periods of crises – like the pandemic – affect the destabilizing influence of retail trading. To provide additional evidence, we replicate our empirical exercise during the 2008-09 financial crisis. Consistent with the COVID-19 period, we again find that retail trading leads to more volatility during the financial crisis vis-á-vis the pre-crisis period. These results again support the idea that periods of crises strengthen the link between retail trading and volatility.
Social media attention before earnings announcements is overly optimistic, fails to predict fundamentals, and generates buying pressure, leading to a 58 bps stock return as intermediaries seek higher returns for providing liquidity. Such price pressure distorts the price informativeness of fundamentals. A return reversal occurs immediately following announcements as markets correct mispricing. How stock prices respond to earning news is endogenous to the effect of social media in the pre-announcement price formation. A pre-announcement trading strategy based on expected social media attention yields 40 bps monthly alphas. When noise trading is systematically driven, it can deter liquidity provision and price revelation.
Expanding upon the known impact of investor sentiment on crowdfunding contributions, we delve deeper to pinpoint specific conditions under which sentiment influences investor choices. Grounded in psychological theory, we assert that sentiment's influence thrives at the peak of investor attention, primarily on a campaign's first day and among projects with greater uncertainty. Our empirical study, based on 447 campaigns with 17,244 daily observations from the United Kingdom's Crowdcube platform, substantiates our claim. Our research enhances the comprehension of equity crowdfunding investors and provides practical insights for its proponents.
Purpose
This study aims to examine investor attention by exploring the trading behavior of investors in US-based exchange traded funds (ETFs) of countries active in the Federation Internationale de Football Association (FIFA) World Cups.
Design/methodology/approach
The present study employs event study methodology to measure abnormal returns and excess trading volume of country-specific ETFs during six FIFA World Cups. The sample of ETFs includes 19 participating countries.
Findings
Consistent with investor behavior that might be explained by attention effect, the study finds that country-specific ETFs from participating countries do indeed behave differently during FIFA World Cups events. The authors find significant evidence of abnormal trading volume and, albeit weaker, abnormal returns during cups.
Originality/value
This study contributes to the literature on investor behavior, linking investor attention with salient sports events.
This paper examines how mobile device usage affect retail investors’ lottery behaviour. Using data from the Chinese stock market, which is dominated by retail investors, we observe a structural change in mobile investing trends in 2015. By employing a structural shift model, we find that higher mobile device usage in the market disproportionately increases the trading volume of lottery stocks and amplifies the lottery-related pricing anomaly. Our results suggest that the use of mobile devices increases retail investors’ demand for lottery stocks by attention-induced trading, but fail to find evidence that mobile devices influence retail investors’ inherent skewness preferences.
This study documents a puzzling historical trend in crash risk for US‐listed firms: between 1950 and 2019, the firm‐year occurrences of idiosyncratic stock price crashes rose from 5.5% to an astonishing 27%. The vastness of the literature notoriously attributes crashes to agency reasons, i.e. self‐interested executives who strategically camouflage bad news via the financial reporting opacity and overinvestment channels. Nonetheless, we document that the opacity– and overinvestment–crash relations are non‐significant, especially in the period following the enforcement of the Sarbanes–Oxley Act. The statistically non‐significant relations are also witnessed in tests that account for the effect of equity‐based compensation incentives and corporate governance functions. Overall, this study criticizes the efficacy of opacity and overinvestment as channels in explaining crash risk. Our conclusions offer avenues for future research to pursue in rationalizing the puzzling surge in stock price crashes.
The author discovered that individual (retail or mass) investors are becoming increasingly significant participants in world financial markets due to globalisation, simplification of cross-border movement of capital, technological measures to ensure direct access to trades, growth of savings and financial awareness of the population in most countries of the world, reduction of tariffs and transaction costs, expansion of the range of liquid financial instruments, and strengthening of information transparency of capital markets. It was established that in Ukraine, despite certain positive developments, regarding the activation of public investments in government bonds and the gradual movement towards the application of the technological experience of developed markets, many problems make it challenging to attract individual investors to the stock market and increase their confidence in the market tools. The paper states that certain problems (in particular, limited financial resources or low financial literacy of the population) are systemic and can be eliminated only with the general development of the national economy and capital markets. The need to reduce the financial and regulatory burden on issuers and financial intermediaries is well-founded since the supervision of non-public issuers only scatters the resources of the state and market participants, increases transaction costs, and does not provide real incentives for the development of the non-state securities market. The author emphasises the need to eliminate Ukraine’s significant lag behind developed capital markets regarding settlement infrastructure development and simplifying operations for individual investors. Considering the practice of tax relief for the investment income of individuals from transactions with state securities, the paper proposes the feasibility of introducing similar benefits for investors in securities of issuers that have been made public.
Several financial assets, such as shares of GameStop or Dogecoin cryptocurrency, became the focus of substantial speculation in early-2021 that resulted in high price volatility and trading volume. This “meme asset wagering” appears to be closely related to the emergence of zero-fee retail brokerages, high-leverage cryptocurrency exchanges, and social media investment communities that facilitate and encourage risky behavior. As an emerging form of financial risk-taking, little is known about participants in these markets. In this study, an internet-based sample (n=643) was recruited to assess the relation between meme asset ownership, perceived risks in gambling and investing, investment knowledge, and measures associated with gambling problems. Results suggest that meme asset wagerers perceive less risk from financial uncertainty, have higher levels of overconfidence in their investment ability, and have higher risk of gambling problems. The findings suggest that these products may be treated like gambling by some individuals.
This paper investigates the influences of FinTech platforms on Chinese mutual fund markets. Using staggered adoption of FinTech platforms as a new way of distributing mutual funds, we find that being on the FinTech platforms attracts more fund flows relative to those funds that are being distributed only through traditional ways. These results are mainly driven by top performing funds, indicating a stronger flow-performance sensitivity. Moreover, fund stock clustering reduced after the adoption of FinTech platforms for bottom performing funds as managers are incentivized to deviate from the crowds to improve performance in order to attract more fund flows.
In AI and algorithmic-driven societies, well-designed visualizations provide epistemic resources for decision-making. At the same time, they also introduce epistemic risks by hiding design and algorithmic processes of data behind the visual display. This creates a paradox of data literacy. We know how to use visual interfaces, but we are not able to "read" them. In addition to "know-how", users should also be able to "know-why". We argue that for the success of AI-driven decision-making it becomes crucial to conceive data and visualization literacy in epistemic, inferential and evidential terms.
We study brokerage platform outages to examine the impact of retail investors on financial markets. We contrast outages at Robinhood, which caters to inexperienced investors, with outages at traditional retail brokers. For stocks with high retail interest, we find that negative shocks to Robinhood investor participation are associated with reduced market order imbalances, increased market liquidity, and lower return volatility, whereas the opposite relations hold following outages at traditional retail brokerages. The findings suggest that herding by inexperienced investors can create inventory risks that harm liquidity in stocks with high retail interest, while other retail trading improves market quality.
I present closed-form solutions for prices, portfolios, and beliefs in a model where four types of investors trade assets over time: naive investors who learn via a social network, “fanatics” possibly spreading fake news, and rational short- and long-term investors. I show that fanatic and rational views dominate over time, and their relative importance depends on their following by influencers. Securities markets exhibit social network spillovers, large effects of influencers and thought leaders, bubbles, bursts of high volume, price momentum, fundamental momentum, and reversal. The model sheds new light on the GameStop event, historical bubbles, and asset markets more generally.
We develop a simple measure of investor attention by aggregating the number of days that a stock hits the upper or lower limit on a monthly basis. This attention proxy describes investor trading behavior and contains information of future stock returns. Using data from the Chinese equity market from 2002 to 2017, we provide extensive evidence that the investor attention captured by our measure negatively predicts cross-sectional stock returns, and the long–short trading strategy based on this attention measure produces significant economic value. We argue that the attention-motivated trading is the main cause behind the return predictability of aggregate limit-hits.
We find evidence of selective exposure to confirmatory information among 400,000 users on the investor social network StockTwits. Self-described bulls are five times more likely to follow a user with a bullish view of the same stock than are self-described bears. Consequently, bulls see 62 more bullish messages and 24 fewer bearish messages than bears do over the same 50-day period. These “echo chambers” exist even among professional investors and are strongest for investors who trade on their beliefs. Finally, beliefs formed in echo chambers are associated with lower ex post returns, more siloing of information, and more trading volume.
We test whether the display of information causally affects investor behavior in a high‐stakes trading environment. Using investor‐level brokerage data from China and a natural experiment, we estimate the impact of a shock that increased the salience of a stock's purchase price but did not change the investor's information set. We employ a difference‐in‐differences approach and find that the salience shock causally increased the disposition effect by 17%. We use microdata to document substantial heterogeneity across investors in the treatment effect. A previously documented trading pattern, the “rank effect,” explains heterogeneity in the change in the disposition effect. This article is protected by copyright. All rights reserved
We exploit a novel natural experiment to establish a causal relation between media attention and consumer investment behavior, independent of the conveyed information. Our findings indicate a 31% local average increase in quarterly capital flows into mutual funds mentioned in a prominent Wall Street Journal “Category Kings” ranking list, compared to those funds which just missed making the list. This flow increase is about seven times larger than extra flows due to the well-documented performance-flow relation. Other funds in the same fund complex receive substantial extra flows as well, especially in smaller complexes. There is no increase in flows when the Wall Street Journal publishes similar lists absent the prominence of the Category Kings labeling. We show mutual fund managers react to the incentive created by the media effect in a strategic way predicted by theory, and present evidence for the existence of propagation mechanisms including increased fund complex advertising subsequent to having a Category King and increased efficacy of subsequent fund media mentions.
We examine a widely popular and controversial source of investment advice, buy and sell recommendations made by Jim Cramer on his popular nightly Mad Money show on CNBC. Our results show that Cramer's recommendations impact share prices of the companies that he mentions. The effects are short-lived and reverse for buy recommendations, although they persist for sell recommendations. Returns for a portfolio of Cramer recommendations are significantly different from zero for some sub periods. Factor analysis suggests that these returns are driven by beta exposure, smaller stocks, growth-oriented stocks, and momentum effects. Overall performance is average after adjusting for factor exposures. Further analysis indicates a significant cluster of new or updated analysts' ratings of stocks just before and just after a Cramer recommendation.
We study the trading of individual investors using transaction data and identifying buyer- or seller-initiated trades. We
document four results: (1) Small trade order imbalance correlates well with order imbalance based on trades from retail brokers.
(2) Individual investors herd. (3) When measured annually, small trade order imbalance forecasts future returns; stocks heavily
bought underperform stocks heavily sold by 4.4 percentage points the following year. (4) Over a weekly horizon, small trade
order imbalance reliably predicts returns, but in the opposite direction; stocks heavily bought one week earn strong returns
the subsequent week, while stocks heavily sold earn poor returns.
We evaluate why individuals invest in high-fee index funds. In our experiments, subjects each allocate $10,000 across four
S&P 500 index funds and are rewarded for their portfolio's subsequent return. Subjects overwhelmingly fail to minimize fees.
We reject the hypothesis that subjects buy high-fee index funds because of bundled nonportfolio services. Search costs for
fees matter, but even when we eliminate these costs, fees are not minimized. Instead, subjects place high weight on annualized
returns since inception. Fees paid decrease with financial literacy. Interestingly, subjects who choose high-fee funds sense
they are making a mistake.
This paper investigates the relationship between aggregate stock market trading volume and the serial correlation of daily
stock returns. For both stock indexes and individual large stocks, the first-order daily return autocorrelation tends to decline
with volume. The paper explains this phenomenon using a model in which risk-averse “market makers” accommodate buying or selling
pressure from “liquidity” or “noninformational” traders. Changing expected stock returns reward market makers for playing
this role. The model implies that a stock price decline on a high-volume day is more likely than a stock price decline on
a low-volume day to be associated with an increase in the expected stock return.
Predictable variation in equity returns might reflect either (1) predictable changes in expected returns or (2) market inefficiency
and stock price “overreaction.” These explanations can be distinguished by examining returns over short time intervals since
systematic changes in fundamental valuation over intervals like a week should not occur in efficient markets. The evidence
suggests that the “winners” and “losers” one week experience sizeable return reversals the next week in a way that reflects
apparent arbitrage profits which persist after corrections for bid-ask spreads and plausible transactions costs. This probably
reflects inefficiency in the market for liquidity around large price changes.
Individual investor trading results in systematic and economically large losses. Using a complete trading history of all investors
in Taiwan, we document that the aggregate portfolio of individuals suffers an annual performance penalty of 3.8 percentage
points. Individual investor losses are equivalent to 2.2% of Taiwan's gross domestic product or 2.8% of the total personal
income. Virtually all individual trading losses can be traced to their aggressive orders. In contrast, institutions enjoy
an annual performance boost of 1.5 percentage points, and both the aggressive and passive trades of institutions are profitable.
Foreign institutions garner nearly half of institutional profits.
This article examines the contribution of stock price overreaction and delayed reaction to the profitability of contrarian
strategies. The evidence indicates that stock prices overreact to firm-specific information, but react with a delay to common
factors. Delayed reactions to common factors give rise to a size-related lead-lag effect in stock returns. In sharp contrast
with the conclusions in the extant literature, however, this article finds that most of the contrarian profit is due to stock
price overreaction and a very small fraction of the profit can be attributed to the lead-lag effect.
If returns on some stocks systematically lead or lag those of others, a portfolio strategy that sells “winners” and buys “losers”
can produce positive expected returns, even if no stock’s returns are negatively autocorrelated as virtually all models of
overreaction imply. Using a particular contrarian strategy we show that, despite negative autocorrelation in individual stock
returns, weekly portfolio returns are strongly positively autocorrelated and are the result of important cross-autocorrelations.
We find that the returns of large stocks lead those of smaller stocks, and we present evidence against overreaction as the
only source of contrarian profits.
In this article we test the random walk hypothesis for weekly stock market returns by comparing variance estimators derived
from data sampled at different frequencies. The random walk model is strongly rejected for the entire sample period (1962–1985)
and for all subperiods for a variety of aggregate returns indexes and size-sorted portfolios. Although the rejections are
due largely to the behavior of small stocks, they cannot be attributed completely to the effects of infrequent trading or
time-varying volatilities. Moreover, the rejection of the random walk for weekly returns does not support a mean-reverting
model of asset prices.
This paper presents new empirical evidence of predictability of individual stock returns. The negative first-order serial correlation in monthly stock returns is highly significant. Furthermore, significant positive serial correlation is found at longer lags, and the twelve-month serial correlation is particularly strong. Using the observed systematic behavior of stock return, one-step-ahead return forecasts are made and ten portfolios are formed from the forecasts. The difference between the abnormal returns on the extreme decile portfolios over the period 1934-87 is 2.49 percent per month. Copyright 1990 by American Finance Association.
We study the complexity of rules by paying experimental subjects to implement a series of algorithms and then eliciting their willingness-to-pay to avoid implementing them again in the future. The design allows us to examine hypotheses from the theoretical “automata” literature about the characteristics of rules that generate complexity costs. We find substantial aversion to complexity and a number of regularities in the characteristics of rules that make them complex and costly for subjects. Experience with a rule, the way a rule is represented, and the context in which a rule is implemented (mentally versus physically) also influence complexity. (JEL C73, D11, D12, D83, D91)
Using a novel database on venue short sales and market design characteristics, we ask: Where do short sellers exploit their information advantage? Consistent with the prediction of Zhu (2014), we find that exchange short sales comprise a larger proportion of trading and are more informative about future prices than dark-pool short sales, particularly when there is greater competition among short sellers to trade and in the presence of short-lived information. When examining market design characteristics, we find that dark pools offering volume-weighted average price crossing attract more short sales, whereas those offering block trading attract fewer short sales.
We document a novel channel through which coordinated trading exerts externalities on financial markets. We study the impact of a financial advisory firm that recommends frequent reallocations between equity and bond funds to Chilean pension investors. The recommendations generate large and coordinated fund flows that are exacerbated by the strategic complementarity arising from fund trading restrictions. The recommendations generate significant price pressure and increased volatility in the stock market. In response to these large trade flows, pension funds shift their allocations to more liquid securities. Our findings suggest that giving retirement savers unconstrained reallocation opportunities can destabilize financial markets.
Received March 11, 2016; editorial decision July 8, 2017 by Editor Itay Goldstein.
This study investigates how banks design financial products to cater to yield-seeking investors. We focus on a large market of investment products targeted exclusively at households: retail structured products. These products typically offer a high return under their best-case scenario –the headline rate– that is nested in a complex payoff formula. Using a text analysis of the payoff formulas of the 55,000 products issued in Europe from 2002 to 2010, we measure product headline rates, complexity and risk. Over this period, product headline rates depart from the prevailing interest rates as the latter decrease, complexity increases, and risky products become more common. In the cross section, the headline rate of a product is positively correlated with its level of complexity and risk. Higher headline rate, more complex, and riskier products, appear more profitable to the banks distributing them. Our results suggest that financial complexity is a by-product of banks catering to yield-seeking investors.
We analyze the role of retail investors in stock pricing using a database uniquely suited for this purpose. The data allow us to address selection bias concerns and to separately examine aggressive (market) and passive (limit) orders. Both aggressive and passive net buying positively predict firms' monthly stock returns with no evidence of return reversal. Only aggressive orders correctly predict firm news, including earnings surprises, suggesting they convey novel cash flow information. Only passive net buying follows negative returns, consistent with traders providing liquidity and benefiting from the reversal of transitory price movements. These actions contribute to market efficiency.
This article tests whether stock market investors appropriately distinguish between new and old information about firms. I define the staleness of a news story as its textual similarity to the previous ten stories about the same firm. I find that firms' stock returns respond less to stale news. Even so, a firm's return on the day of stale news negatively predicts its return in the following week. Individual investors trade more aggressively on news when news is stale. The subsequent return reversal is significantly larger in stocks with above-average individual investor trading activity. These results are consistent with the idea that individual investors overreact to stale information, leading to temporary movements in firms' stock prices.
We analyze 1,607 investors who switched from phone-based to online trading during the 1990s. Those who switch to online trading
perform well prior to going online, beating the market by more than 2% annually. After going online, they trade more actively,
more speculatively, and less profitably than before—lagging the market by more than 3% annually. Reductions in market frictions
(lower trading costs, improved execution speed, and greater ease of access) do not explain these findings. Overconfidence—augmented
by self-attribution bias and the illusions of knowledge and control—can explain the increase in trading and reduction in performance
of online investors.
This study documents a six-fold increase in short-term return reversals during earnings announcements relative to non-announcement periods. Following prior research, we use reversals as a proxy for expected returns market makers demand for providing liquidity. Our findings highlight significant time-series variation in the magnitude of short-term return reversals and suggest that market makers demand higher expected returns prior to earnings announcements because of increased inventory risks that stem from holding net positions through the release of anticipated earnings news. Collectively, our findings suggest that uncertainty regarding anticipated information events elicits predictable increases in the compensation demanded for providing liquidity and that these increases significantly affect the dynamics and information content of market prices.
This paper investigates a unique dataset that enables us to determine the aggregate buy and sell volume of individual investors for a large cross-section of NYSE stocks. We find that individuals trade as if they are contrarians, and that the stocks that individuals buy exhibit positive excess returns in the following month. These patterns are consistent with the idea that risk-averse individuals provide liquidity to meet institutional demand for immediacy. We further examine the relation between individual investor sentiment and short-horizon (weekly) return reversals that have been documented in the literature. Our results reveal that individual investor sentiment predicts future returns, and that the information content of investor sentiment is distinct from that of past returns or past volume. Furthermore, the trading of individuals predicts weekly returns in the post-2000 era for stocks of all sizes, while past return seems to have lost its predictive power for all but small stocks over the same time period. Lastly, we note that there is very little cross-sectional correlation of our individual sentiment measure across the stocks in our sample.
We examine the stock recommendations of Jim Cramer televised on CNBC’s Mad Money, and document significant market reactions (i.e., announcement returns and volume) to Cramer’s recommendations, particularly
for small capitalization stocks. The following findings indicate that the announcement returns are primarily due to price
pressure from uninformed trading as opposed to the recommendations providing new value related information: announcement returns
reverse following buy recommendations; bid-ask spreads temporarily decline; and there is no evidence of positive longer-term
abnormal returns. One implication, when considered in combination with other works, is that investors should be cautious in
following stock recommendations announced in the mass-media.
The offering prices of 64 issues of a popular retail structured equity product were, on average, almost 8% greater than estimates of the products' fair market values obtained using option pricing methods. Under reasonable assumptions about the underlying stocks' expected returns, the mean expected return estimate on the structured products is slightly below zero. The products do not provide tax, liquidity, or other benefits, and it is difficult to rationalize their purchase by informed rational investors. Our findings are, however, consistent with the recent hypothesis that issuing firms might shroud some aspects of innovative securities or introduce complexity to exploit uninformed investors.
This study analyzes the effect of second-hand information on the behavior of security prices and volume using analysts' recommendations published in the monthly “Dartboard” column of the Wall Street Journal. For the two days following the publication of the recommendations, average positive abnormal returns of 4 percent—nearly twice the level of abnormal returns documented in previous research on analyst recommendations—and average volume double normal volume levels on the two days following publication of the recommendations are documented. The positive abnormal return on announcement is partially reversed within 25 trading days. The authors conclude that the positive abnormal return on announcement of the recommendations is a result of naive buying pressure as well as the information content of the analysts' recommendations.
Stocks in the Shanghai market that hit upper price limits typically exhibit three characteristics: high returns, high volumes, and news coverage. We show that these price limit events attract investors' attention. Attention-grabbing events lead active individual investors to buy stocks they have not previously owned. Consistent with lowering investor search costs, events that affect a few (many) stocks lead to increased (decreased) buying. Upper price limit events coincide with initial price increases followed by statistically significant price mean reversion over the following week. Rational traders (statistical arbitrageurs) profit in response to attention-based buying. Smart traders accumulate shares on date t, sell shares on date t + 1, and earn a daily average profit of 1.16%. We show the amount they invest predicts the degree of attention-based buying by individual investors. We end by decomposing individual investor trades in order to estimate losses attributable to behavioral biases.
This paper examines institutional price pressure in equity markets by studying mutual fund transactions caused by capital flows from 1980 to 2004. Funds experiencing large outflows tend to decrease existing positions, which creates price pressure in the securities held in common by distressed funds. Similarly, the tendency among funds experiencing large inflows to expand existing positions creates positive price pressure in overlapping holdings. Investors who trade against constrained mutual funds earn significant returns for providing liquidity. In addition, future flow-driven transactions are predictable, creating an incentive to front-run the anticipated forced trades by funds experiencing extreme capital flows.
We use mutual fund manager data from the technology bubble to examine the hypothesis that inexperienced investors play a role in the formation of asset price bubbles. Using age as a proxy for managers’ investment experience, we find that around the peak of the technology bubble, mutual funds run by younger managers are more heavily invested in technology stocks, relative to their style benchmarks, than their older colleagues. Furthermore, young managers, but not old managers, exhibit trend-chasing behavior in their technology stock investments. As a result, young managers increase their technology holdings during the run-up, and decrease them during the downturn. Both results are in line with the behavior of inexperienced investors in experimental asset markets. The economic significance of young managers’ actions is amplified by large inflows into their funds prior to the peak in technology stock prices.
The paper presents empirical evidence based on the U.S. Consumer Expenditure Survey that accounting for limited asset market participation is important for estimating the elasticity of intertemporal substitution. Differences in estimates of the EIS between asset holders and nonasset holders are large and statistically significant. This is the case whether estimating the EIS on the basis of the Euler equation for stock index returns or the Euler equation for Treasury bills, in each case distinguishing between asset holders and nonasset holders as best as possible. Estimates of the EIS are around 0.30.4 for stockholders and around 0.81 for bondholders and are larger for households with larger asset holdings within these two groups.
The author investigates whether analysts' recommendations in the 'Dartboard' column of the Wall Street Journal have an impact on stock prices and whether this impact is temporary or long-lived. He documents a significant two-day announcement effect that is reversed within fifteen days. This announcement effect is intertwined with the pros' track record. The author's study supports the price pressure hypothesis: abnormal returns and trading volumes around the announcement day are mainly driven by noise trading from naive investors. On average, investors following the experts' recommendations lose 3.8 percent on a risk-adjusted basis over a six-month holding period. Copyright 1999 by University of Chicago Press.
The net buying (selling) volume of the most net buyer (seller) brokers over a unit period is a widely followed piece of information in Istanbul Stock Market, which most market commentaries inaccurately refer to as “the net money in- or outflow”. It is, in fact, a proxy for big investors’ trading. In this note, we test whether this information has predictive value, whether market participants’ emphasis on this information is justified, or just an illusion. By doing so, we add to the literature on the relationship between big investors’ trading and stock returns, using a unique information set. Results suggest a significant contemporaneous association between the “net inflow” and current returns, but little predictive value
In the 2000 U.S. Presidential campaign, George W. Bush advocated a partial privatiza- tion of the Social Security system. According to his plan, a portion of the payroll tax would be designated for individual savings accounts. At the same time as this issue was being debated in the United States, Sweden was in the process of launching a system that is very similar to Pres- ident Bush's proposal. Although Bush's plan did not get much attention in the early years of his administration, the proposal may resurface either in the United States or in other countries. If so, important lessons can be learned from the Swedish experience. In particular, the Swedish plan adopted an interesting mix of design choices that can now be evaluated based on three years of post-implementation experience. Although there is a large literature in eco- nomics on the design of social-security systems, most of that literature is concerned with mac- roeconomic considerations such as funding. In contrast, there has been much less attention devoted to the details of how plans might be designed, in part because these details do not seem important from a standard economic per- spective. In this paper, we reverse this usual pattern and focus our attention on the design aspects of the Swedish plan. We find that, al- though most of the design choices are those that might be approved by most economists, in some cases these choices produced unde- sirable consequences.
Out of the dark: Hedge fund reporting biases and commercial databases
- Adam L Aiken
All that glitters: The effect of attention and news on the buying behavior of individual and institutional investors
- Brad M Barber
Following the robinhood money
- Cheng
- Claire Hong
Market madness? The case of mad money
- Joseph Engelberg
- Benjamin Loos
Evaporating liquidity
- Stefan Nagel