Are retail investors the culprits? Evidence from Australian individual stock price bubbles

Abstract

We address the question of whether the trading of retail investors causes stock price anomalies. Our intent is to study settings in which retail investors are most likely to have influence on market prices. Previous research suggests that retail investors have more influence in small capitalization stocks, and argues that retail investors are most likely to be irrational. Most theories of stock price anomalies hypothesize the presence of irrational traders. Consequently, we focus on stock price anomalies in primarily small capitalization stocks. Our data are from the Australian Stock Exchange Clearinghouse. The Australian stock market is characterized by a high level of direct stock holdings by individual investors, further enhancing the likelihood of retail investors' influence. We investigate the Granger causality between investor category trading and stock prices, and display the relative trading volume of the investor categories. We conclude that retail investors are not responsible for stock mispricing. Since retail investors do not affect prices in this carefully selected environment, we infer that their trading is unlikely to influence stock market prices. Our conclusion has important implications for theories, particularly behavioral finance theories, that are dependent on the influence of retail investor trading in stock markets.retail investor, individual investor, asset pricing, behavioral finance,

Retail investors exonerated: the case of the January effect

“…, 1990). Our results are consistent with those of Henker and Henker (2010), who conclude that retail investor trading has a negligible impact on market prices. However, the question of cause of the January effect is still outstanding.…”

“…Retail investor trading does not subsume capitalization in the January effect. Our findings are consistent with Henker and Henker (2010), who argue that retail investors are not responsible for stock‐price bubbles, another asset pricing anomaly.…”

“…Correlated trading is a necessary, but not sufficient, condition to conclude that retail investor trading is noteworthy enough to generate an anomaly. Henker and Henker (2010) find that retail investors do not exhibit the necessary trading pattern, nor large‐enough trading volume, to cause stock price bubbles. However, the evidence in favour of retail investors as a possible cause of the January effect (Gottschalk et al.…”

Domestic Retail Investors’ Participation and Stock Price Efficiency in Nigeria

“…Using a different approach Henker and Henker (2010) examine the effect of retail trading on stock price anomalies in small-capitalization stocks. The authors assert that the price movements in the Australian stock market small-capitalization stocks were an environment likely to have high retail price impacts, based on Lee, Shleifer and Thaler's (1991) finding that small-capitalization stocks are dominated by retail holdings.…”

“…However, the persistence of retail price impacts has been attributed to a lack of insufficient trades by institutional traders to correct retail pricing errors in noise trader models (Kogan et al, 2006(Kogan et al, , 2017Shiller, 1989). In other studies, Chang and Fang (2020), Lien, Hung & Lin (2020), Henker andHenker (2010), andJackson (2003) find that retail trades have no price impacts. This study aligns with the assumption that irrational retail investors misperceive the actual distribution of prices.…”