RFS Advance Access published online on April 16, 2008
Review of Financial Studies, doi:10.1093/rfs/hhn035
Do Retail Trades Move Markets?
University of California
University of California
University of California
Address correspondence to Ning Zhu, University of California, Davis, 129 AOB IV, One Shields Avenue, UC Davis, Davis, CA 95616; telephone: (530)-752-3871; e-mail: nzhu{at}ucdavis.edu
JEL Classification: G11, G12, G14
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Abstract |
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We study the trading of individual investors using transaction data and identifying buyer- or seller-initiated trades. We document four results: (1) Small trade order imbalance correlates well with order imbalance based on trades from retail brokers. (2) Individual investors herd. (3) When measured annually, small trade order imbalance forecasts future returns; stocks heavily bought underperform stocks heavily sold by 4.4 percentage points the following year. (4) Over a weekly horizon, small trade order imbalance reliably predicts returns, but in the opposite direction; stocks heavily bought one week earn strong returns the subsequent week, while stocks heavily sold earn poor returns.
We appreciate the comments of Devraj Basu, Darrell Duffie, Paul Tetlock, Mark Seasholes, Sheridan Titman, and seminar participants at the 1st Behavioral Finance Symposium, Beijing University, Berkeley-Stanford Joint Finance Seminar, the BSI-Gamma Foundation Conference, China International Finance Conference (Xi’an), Columbia University, Emory University, the European Finance Association Meeting (Zurich), Fuller Thaler Asset Management, Goldman Sachs, HEC, INQUIRE UK meeting, INSEAD, the JOIM Conference, Lehman Brothers, Massey University, the NBER Asset Pricing Meeting, National Cheng-Chi University (Taiwan), National University of Singapore, Simon Fraser University, Singapore Management University, the University of Melbourne, and the Western Finance Association Meetings. We are extremely grateful to the BSI-Gamma foundation for providing financial support for this research. We thank Shane Shepherd for helpful research assistance. Bob Wood helped us navigate the ISSM data, while Gjergji Cici helped us navigate the TAQ data.