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Reprint of: Do retail traders destabilize financial markets? An investigation surrounding the COVID-19 pandemic

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  • Baig, Ahmed S.
  • Blau, Benjamin M.
  • Butt, Hassan A.
  • Yasin, Awaid

Abstract

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.

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  • Baig, Ahmed S. & Blau, Benjamin M. & Butt, Hassan A. & Yasin, Awaid, 2023. "Reprint of: Do retail traders destabilize financial markets? An investigation surrounding the COVID-19 pandemic," Journal of Banking & Finance, Elsevier, vol. 147(C).
    • Handle: RePEc:eee:jbfina:v:147:y:2023:i:c:s0378426622003247
    DOI: 10.1016/j.jbankfin.2022.106744
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    Cited by:

    1. Allen, Kyle D. & Baig, Ahmed & Winters, Drew B., 2023. "The response of money market funds to the COVID-19 pandemic," Finance Research Letters, Elsevier, vol. 54(C).
    2. Nicolas Cofre & Magdalena Mosionek-Schweda, 2023. "A simulated electronic market with speculative behaviour and bubble formation," Papers 2311.12247, arXiv.org.

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    More about this item

    Keywords

    COVID-19 Pandemic; Global financial crisis; Retail trading; Volatility; Local projections;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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