Retail investors and the behavioral component of idiosyncratic volatility

Utilizing the unique institutions and datasets in China, we find that the idiosyncratic volatility (IVOL) of stock returns correlates positively with retail investor activities at both the market aggregate and individual stock levels. Further analysis indicates that this effect is more pronounced in small-cap, high-priced stocks, and those with low institutional ownership. However, this relationship does not extend to the STAR Board, which is largely inaccessible to most retail investors. Additionally, employing the exit of Google from China as a quasi-natural experiment, we demonstrate that the relationship between retail investor activities and IVOL is likely causal. Lastly, we find that retail investor activities in China do not provide informative signals about future returns, and our findings are not attributable to information incorporation. Overall, our study suggests that IVOL contains an important behavioral component, to which noisy retail investor activities contribute.