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Speculative Retail Trading and Asset Prices

Published online by Cambridge University Press:  01 March 2013

Bing Han  and
Alok Kumar
Bing Han
Affiliation:
bing.han@rotman.utoronto.ca, Rotman School of Management, University of Toronto, 105 St. George St, Toronto, ON M5S 3E6, Canada, and University of Texas at Austin
Alok Kumar
Affiliation:
akumar@miami.edu, School of Business Administration, University of Miami, 514 Jenkins Building, Coral Gables, FL 33124.
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Abstract

This paper examines the characteristics and pricing of stocks that are actively traded by speculative retail investors. We find that stocks with high retail trading proportion (RTP) have strong lottery features and they attract retail investors with strong gambling propensity. Furthermore, these stocks tend to be overpriced and earn significantly negative alpha. The average monthly return differential between the extreme RTP quintiles is −0.60%. This negative RTP premium is stronger among stocks that have lottery features or arelocated in regions where people exhibit stronger gambling propensity. Collectively, these results indicate that speculative retail trading affects stock prices.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 2 , April 2013 , pp. 377 - 404
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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