The impact of fractional trading on risk aversion for non-professional investors

Janhavi Shankar Tripathi and Erick W. Rengifo

Finance Research Letters, 2023, vol. 52, issue C

Abstract: We study the impact of fractional trading (FT) on non-professional investors' decision-making under uncertainty. Using the expected utility framework, we show that with the recent easiness to trade in stock markets and with the option to buy or sell a fraction of a share of a stock or ETF (exchange-traded fund), the risk appetite of non-professional investors might have gone up, increasing market participation and demand for stocks. Furthermore, we show that this change in the non-professional investor's risk aversion behavior varies by household income levels. Based on constructed probabilities, we estimate that approximately 83 billion dollars have been newly invested in stock market post-FT. Our results suggest that easy access to trade stocks and FT allows households with lower discretionary income a new tool to diversify their portfolio and participate in the stock markets by investing in different stocks and ETFs while at the same time having a significant impact on the stocks' price levels and price dynamics observed in the markets.

Keywords: Fintech; Fractional trading; Household finance; Investor behavior; Portfolio theory; Risk aversion (search for similar items in EconPapers)
JEL-codes: C0 G0 G1 G4 G5 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322007231

DOI: 10.1016/j.frl.2022.103547

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