Retail traders and co-movement: Evidence from Robinhood trading activity

Afshin Haghighi, Robert Faff and Barry Oliver

International Review of Financial Analysis, 2024, vol. 95, issue PB

Abstract: We find evidence that retail trading activity by Robinhood traders is associated with lower levels of return co-movement and liquidity co-movement. We demonstrate the significance of these relationships primarily employing a two-way fixed effects panel data regression model covering cross-sectional and time-series observations of US stock trades from May 2018 to July 2020. The findings hold true across various cross-sectional subsamples and across subperiods before and after March 2020, coinciding with the stock market crash induced by heightened risks of the COVID-19 pandemic. With regard to returns, our analysis identifies three co-movement channels: 1) increased correlated trading by retail traders, 2) extended delay in incorporating market-wide information, and 3) a direct effect influenced by the integration of firm-specific information into prices. In contrast, for liquidity co-movement, we fail to identify evidence of plausible channels relating to either volatility or correlated trading. However, it appears that the significant direct effects that we document stem from a broadened array of trading strategies when retail traders contribute to the market. Collectively, these findings have important implications as return co-movement limits investors' ability to diversify investments and manage risks, while liquidity co-movement heightens market vulnerability to crashes.

Keywords: Retail traders; Individual investors; Co-movement; Liquidity; Commonality in return (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924003636

DOI: 10.1016/j.irfa.2024.103431

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