How retail investors affect the stock market?

Xiaozhou Zhou, Feng Zhan and Chang Chan

Pacific-Basin Finance Journal, 2025, vol. 90, issue C

Abstract: Using the expansion of price limit regulation as a quasi-natural experiment, this study explores the trade-off between stock market liquidity and price efficiency where retail investors act as de facto market makers. Our empirical results show a significant variation of retail investors' trading activities after the expansion of the daily price limit. Economically, this variation represents around $26.73 million fewer shares per day traded after the regulatory change. Furthermore, we show that this reduction of retail investors' participation leads to a decrease in liquidity, but an improvement in stock price efficiency. Our empirical findings complement the theoretical work of Subrahmanyam (1991) and Han et al. (2016) and highlight the importance and complexity of retail investors' trading activities.

Keywords: Retail investors; Liquidity; Price efficiency; Price limit restriction (search for similar items in EconPapers)
JEL-codes: G01 G11 G14 G18 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:90:y:2025:i:c:s0927538x2400372x

DOI: 10.1016/j.pacfin.2024.102620

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