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Animal spirits on steroids: Evidence from retail options trading in India

Author

Listed:
  • Agarwal, Vikas
  • Ghosh, Pulak
  • Prabhala, Nagpurnanand R.
  • Zhao, Haibei

Abstract

We analyze a market-wide panel dataset on retail options trading from India, a market with an 80% share in option contracts traded worldwide. Retail traders both concentrated in and dominate index options trading. They exhibit short-term speculative behavior with significant day trading, short- duration directional bets especially as options converge to 0DTE and make significant losses. Three natural experiments indicate that financial constraints and lottery-like preferences likely shape investor behavior. An exogenous increase in the supply of short-maturity options induces trading. Lot-size increases and delivery margins trying to curb speculation are offset by shifts to small ticket-size, riskier options. While financial market participation increases welfare in canonical household finance models, it can also entrench speculative behavior that is difficult to undo.

Suggested Citation

  • Agarwal, Vikas & Ghosh, Pulak & Prabhala, Nagpurnanand R. & Zhao, Haibei, 2025. "Animal spirits on steroids: Evidence from retail options trading in India," CFR Working Papers 25-09, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:327125
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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G50 - Financial Economics - - Household Finance - - - General
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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