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Small Trades and the Cross-Section of Stock Returns

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  • Soeren Hvidkjaer
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    Abstract

    This paper uses volume arising from small trades to analyze the relationship between retail investor trading behavior and the cross-section of future stock returns. The central finding is that stocks with intense sell-initiated small-trade volume, measured over the past several months, outperform stocks with intense buy-initiated small-trade volume. This return difference accrues from the first month after the portfolio formation up to two years later. Among small- and medium-sized firms, the return difference continues in the third year. The results suggest that stocks favored by retail investors subsequently experience prolonged underperformance relative to stocks out of favor with retail investors. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 21 (2008)
    Issue (Month): 3 (May)
    Pages: 1123-1151

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    Handle: RePEc:oup:rfinst:v:21:y:2008:i:3:p:1123-1151

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    Cited by:
    1. Dai, Yunhao & Kong, Dongmin & Wang, Maobin, 2013. "Investor reactions to food safety incidents: Evidence from the Chinese milk industry2We thank Colin Poulton (Managing Editor), two anonymous referees, Martin Qiu, Shasha Liu, and Yan Sheng for helpful," Food Policy, Elsevier, vol. 43(C), pages 23-31.
    2. : Constantinos Antonio & : John A. Doukas & : Avanidhar Subrahmanyam, 2013. "Investor Sentiment and Beta Pricing," Working Papers wpn13-05, Warwick Business School, Finance Group.
    3. Huimin Chung & Jie Lu & Bruce Mizrach, 2009. "An Empirical Analysis of the Shanghai and Shenzen Limit Order Books," CQE Working Papers 0109, Center for Quantitative Economics (CQE), University of Muenster.
    4. Lauren Cohen & Dong Lou, 2011. "Complicated Firms," FMG Discussion Papers dp683, Financial Markets Group.
    5. Camille Magron, 2012. "Performance of individual investors and personal investment objectives," Working Papers of LaRGE Research Center 2012-07, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg (France).
    6. Rawley Z Heimer, 2013. "Friends do let friends buy stocks actively," Working Paper 1314, Federal Reserve Bank of Cleveland.
    7. Kaniel, Ron & Liu, Shuming & Saar, Gideon & Titman, Sheridan, 2011. "Individual Investor Trading and Return Patterns around Earnings Announcements," CEPR Discussion Papers 8259, C.E.P.R. Discussion Papers.
    8. Rongsheng Shi & Zhi Xu & Zhengrong Chen & Jing Huang, 2012. "Does attention affect individual investors' investment return?," China Finance Review International, Emerald Group Publishing, vol. 2(2), pages 143-162, April.
    9. Ülkü, Numan & Weber, Enzo, 2013. "Identifying the interaction between stock market returns and trading flows of investor types: Looking into the day using daily data," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2733-2749.
    10. Steven L. Heston & Robert A. Korajczyk & Ronnie Sadka, 2010. "Intraday Patterns in the Cross-section of Stock Returns," Journal of Finance, American Finance Association, vol. 65(4), pages 1369-1407, 08.
    11. Cohen, Lauren & Lou, Dong, 2012. "Complicated firms," Journal of Financial Economics, Elsevier, vol. 104(2), pages 383-400.
    12. : John A. Doukas & Constantinos Antoniou & Avanidhar Subrahmanyam, 2011. "Sentiment and Momentum," Working Papers wpn11-02, Warwick Business School, Finance Group.
    13. Schmeling, Maik, 2009. "Investor sentiment and stock returns: Some international evidence," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 394-408, June.
    14. Dong Lou, 2013. "Attracting investor attention through advertising," LSE Research Online Documents on Economics 54382, London School of Economics and Political Science, LSE Library.
    15. Foucault, Thierry & Sraer, David & Thesmar, David, 2008. "Individual Investors and Volatility," CEPR Discussion Papers 6915, C.E.P.R. Discussion Papers.
    16. Patrick Roger, 2012. "Portfolio diversification dynamics of individual investors: a new measure of investor sentiment," Working Papers of LaRGE Research Center 2012-01, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg (France).
    17. Chan, Yue-Cheong, 2014. "How does retail sentiment affect IPO returns? Evidence from the internet bubble period," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 235-248.
    18. Maobin Wang & Chun Qiu & Dongmin Kong, 2011. "Corporate Social Responsibility, Investor Behaviors, and Stock Market Returns: Evidence from a Natural Experiment in China," Journal of Business Ethics, Springer, vol. 101(1), pages 127-141, June.

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