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The Equity Market Implications of the Retail Investment Boom

Author

Listed:
  • Philippe van der Beck

    (Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute)

  • Coralie Jaunin

    (University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Swiss Finance Institute)

Abstract

Retail trading activity has soared during the COVID-19 pandemic. This paper quantifies the impact of the retail investment boom on the US stock market within a structural model. Using account holdings data from the online trading platform “Robinhood Markets Inc.” and 13F filings, we estimate retail and institutional demand curves and derive aggregate pricing implications via market clearing. The inelastic nature of institutional demand allows Robinhood investors to have a substantial effect on stock returns during the COVID-19 pandemic despite their negligible wealth share. We find that Robinhood traders account for over 7% of the cross-sectional variation in stock returns during the second quarter of 2020. We furthermore show that without the surge in retail trading activity the aggregate market capitalization of the smallest quintile of US stocks would have been over 30% lower. Lastly, Robinhood traders’ are able to affect the price of some large individual companies that are being held primarily by passive institutional investors.

Suggested Citation

  • Philippe van der Beck & Coralie Jaunin, 2021. "The Equity Market Implications of the Retail Investment Boom," Swiss Finance Institute Research Paper Series 21-12, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2112
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3776421
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    Citations

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    Cited by:

    1. Niculaescu, Corina E. & Sangiorgi, Ivan & Bell, Adrian R., 2023. "Does personal experience with COVID-19 impact investment decisions? Evidence from a survey of US retail investors," International Review of Financial Analysis, Elsevier, vol. 88(C).
    2. Kuvvet, Emre, 2022. "Robinhood investors and corporate misconduct," Global Finance Journal, Elsevier, vol. 54(C).
    3. Jean-Philippe Bouchaud, 2021. "The Inelastic Market Hypothesis: A Microstructural Interpretation," Papers 2108.00242, arXiv.org, revised Jan 2022.
    4. André Betzer & Jan Philipp Harries, 2022. "How online discussion board activity affects stock trading: the case of GameStop," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(4), pages 443-472, December.
    5. Eaton, Gregory W. & Green, T. Clifton & Roseman, Brian S. & Wu, Yanbin, 2022. "Retail trader sophistication and stock market quality: Evidence from brokerage outages," Journal of Financial Economics, Elsevier, vol. 146(2), pages 502-528.
    6. Wagner, Alexander F. & Glossner, Simon & Matos, Pedro Pinto & Ramelli, Stefano, 2022. "Do institutional investors stabilize equity markets in crisis periods? Evidence from COVID-19," CEPR Discussion Papers 15070, C.E.P.R. Discussion Papers.
    7. Gempesaw, David & Henry, Joseph J. & Velthuis, Raisa, 2022. "Piecing together the extent of retail fractional trading," Global Finance Journal, Elsevier, vol. 54(C).
    8. Gong Cheng & Eric Jondeau & Benoit Mojon & Dimitri Vayanos, 2023. "The impact of green investors on stock prices," BIS Working Papers 1127, Bank for International Settlements.
    9. Tolga Buz & Gerard de Melo, 2021. "Should You Take Investment Advice From WallStreetBets? A Data-Driven Approach," Papers 2105.02728, arXiv.org.
    10. David Ardia & Cl'ement Aymard & Tolga Cenesizoglu, 2023. "Fast and Furious: A High-Frequency Analysis of Robinhood Users' Trading Behavior," Papers 2307.11012, arXiv.org.
    11. Tolga Buz & Gerard de Melo, 2022. "Democratization of Retail Trading: Can Reddit's WallStreetBets Outperform Investment Bank Analysts?," Papers 2301.00170, arXiv.org.
    12. Umar, Zaghum & Yousaf, Imran & Zaremba, Adam, 2021. "Comovements between heavily shorted stocks during a market squeeze: Lessons from the GameStop trading frenzy," Research in International Business and Finance, Elsevier, vol. 58(C).
    13. Sobhesh Kumar Agarwalla & Sumit Saurav & Jayanth R. Varma, 2022. "Lottery and bubble stocks and the cross‐section of option‐implied tail risks," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(2), pages 231-249, February.

    More about this item

    Keywords

    Retail investors; Demand system; Institutional investors; COVID-19; Robinhood;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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