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

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

doi:10.1016/j.jbankfin.2022.106627

Cited by 10 publications

(9 citation statements)

References 84 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…For example, Kelley and Tetlock (2013) show that retail orders have predictive power of future stock returns, particularly in small stocks with low institutional ownership (Kumar and Lee, 2006). In general, retail investors are capable of predicting shortterm returns during the times of crisis (Barrot et al, 2016;Boehmer et al, 2021), and continue trading despite increasing risk and volatility (Hoffmann et al, 2013;Pagano et al, 2021;Baig et al, 2022;Welch, 2022). Retail investors provide much-needed liquidity during crisis (Barrot et al, 2016;Ozik et al, 2021) and acted as a market-stabilizing force during the pandemic (Welch, 2022); however, their trade before and during the pandemic is attention-induced (Kumar and Lee, 2006;Barber et al, 2022) and follow good returns (Ozik et al, 2021;Welch, 2022).…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

“…Research also cautions that individual traders' short-term gains are likely to be due to mispricing and temporary, with a potential for price reversal and underperformance in the future (Chan and Fong, 2004;Hvidkjaer, 2008;Barber et al, 2009b). Others warn of retail investors' noise trading and increasing market volatility caused by it (Foucault et al, 2011;Baig et al, 2022). The overall world and market conditions, e.g.…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

“…Others warn of retail investors’ noise trading and increasing market volatility caused by it (Foucault et al. , 2011; Baig et al. , 2022).…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

See 2 more Smart Citations

The changing investor demographics of an emerging IPO market during the COVID-19 pandemic

Tütüncü

2022

CFRI

View full text Add to dashboard Cite

PurposeThe last two years are characterized by record numbers of initial public offerings (IPOs), foreign investor abstinence and rising retail investor appetite in the Turkish stock market. This study aims to investigate whether retail investor dominance coupled with foreign investor aversion has significant impact on initial and short-term returns.Design/methodology/approachThe research covers the population of 188 companies going public at Borsa Istanbul from 2010 to the end of 2021. Three hypotheses are developed and tested by means of ordinary least squares and Tobit regressions to examine the association between investor allocations and returns. A new measure for retail investor trade size, average retail investment per capita (ARI) is utilized to explain the linkage between retail investor appetite and short-term returns. Two-stage least squares and Heckman selection regressions are employed for robustness tests to address potential endogeneity.FindingsPandemic IPOs provide significantly larger short-term returns than pre-pandemic IPOs measured up to one month. Underpricing during the pandemic is not significantly greater due to 10% daily price limit, which leads to a gradual release of retail investor appetite and increase in stock prices in the short term. Retail investors control 66% of the market during the pandemic compared to 35% before, while foreign institutional investor market share declines from 53% to 6%. Average retail investor number in an offering increases by 55.4-fold during the pandemic, resulting in substantially smaller allocations to the average individual investor. Greater returns during the pandemic are associated with smaller retail investment per capita, while domestic institutional investment is associated with lower returns as typically expected from institutional investors, although its significance disappears after controlling for potential endogeneity.Research limitations/implicationsThis study investigates returns up to one month. To better understand whether short-termism of retail investors and recent foreign investor aversion have detrimental effect on companies, and on the market as a whole, longer-term studies are needed. This is not possible at the current stage since not enough time has passed.Practical implicationsThis research is relevant to emerging market investors and companies due to the ongoing foreign investor aversion and fast-changing market conditions. The research cautions market participants against the short-termism of retail investors and urges policymakers to regain investors with longer investment horizons.Social implicationsMany newcomer retail investors are in the stock market due to lack of more profitable alternatives in Turkey. Although their participation is accompanied by larger short-term returns for the time being, the current momentum is unlikely to last long as the pandemic ends, and interest rates around the world begin to be raised. The study urges small investors to invest in a more informed manner and aim for longer time horizons, as it may not be possible to make a quick profit in the stock markets in the near future.Originality/valueThis is the first study to investigate changing investor profile in emerging markets and its impact on returns following pandemic declaration. The question is important because the investor composition affects the investment horizon in the market.

show abstract

Section: Literature Review and Hypothesesmentioning

confidence: 99%

Section: Literature Review and Hypothesesmentioning

confidence: 99%

See 1 more Smart Citation

The changing investor demographics of an emerging IPO market during the COVID-19 pandemic

Tütüncü

2022

CFRI

View full text Add to dashboard Cite

show abstract

“…The other side of the barricade comprises institutional investors, who pull all their short bets on depressed stocks. These questions are of utmost importance in the light of two recent studies demonstrating that retail investors may have the power to spur instability in equity prices, especially in turbulent times such as the COVID-19 and the 2008 subprime crisis (Aharon et al, 2022;Baig et al, 2022).…”

Section: Introductionmentioning

confidence: 99%

Did David Win a Battle or the War Against Goliath? Dynamic Return and Volatility Connectedness between the GameStop Stock and the High Short Interest Indices

et al. 2021

View full text Add to dashboard Cite

“…Our findings are consistent with Pham et al (2021), who use firm headquarter location and state-level COVID-19 data to find a negative relation between COVID-19 severity and stock returns. Last, we contribute to the growing literature that examines various aspects of market quality around the COVID-19 pandemic (see e.g., Albulescu, 2021;Baig et al, 2022;Baker et al, 2020;Bretscher et al, 2020;John & Li, 2021;Landier & Thesmar, 2020;Pham et al, 2021;Ramelli & Wagner, 2020, among others).…”

mentioning

confidence: 99%

COVID‐19 intensity across U.S. states and the liquidity of U.S. equity markets

Baig

Berkowitz

DeLisle

et al. 2023

The Financial Review

View full text Add to dashboard Cite

We study the effects of COVID‐19 intensity on equity market liquidity across U.S. states. We exploit cross‐sectional variation in cases and deaths to investigate any association with the deterioration of stock liquidity of firms whose headquarters or operations are in the corresponding state(s). Our motivation stems from several underlying economic channels such as order processing costs, inventory costs, and adverse selection costs. We find strong negative relations between pandemic intensity and various intra‐day liquidity measures. Our results are more pronounced for firms operating in states with more stringent containment and health measures and within industries with greater risk exposure.

show abstract

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

Cited by 10 publications

References 84 publications

The changing investor demographics of an emerging IPO market during the COVID-19 pandemic

The changing investor demographics of an emerging IPO market during the COVID-19 pandemic

Did David Win a Battle or the War Against Goliath? Dynamic Return and Volatility Connectedness between the GameStop Stock and the High Short Interest Indices

COVID‐19 intensity across U.S. states and the liquidity of U.S. equity markets

Contact Info

Product

Resources

About