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Speculate against speculative demand

Owain ap Gwilym, A. Kita and Qingwei Wang

International Review of Financial Analysis, 2014, vol. 34, issue C, 212-221

Abstract: Measuring individual investors' speculative demand for stocks using the Google search volume index (hereafter “SVI”) on penny stocks, we examine how it relates to the return dynamics of U.S. stock indices. Speculative demand leads to a short-term return reversal. A simple trading strategy that sells a stock index when SVI is high and buys it otherwise generates annual excess returns of up to 20% over the buy-and-hold strategy. Applying the trading strategy to the corresponding ETFs and index futures yields similar results. Transaction costs, liquidity risk and strong time variation of the excess returns can potentially limit the exploitation of arbitrage opportunities.

Keywords: Investor attention; Speculative demand; Penny stocks; Market returns; Trading strategy; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: G02 G12 G14 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.irfa.2014.03.001

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