Exposing Market Anomalies: The Role of Retail Trading in Momentum Profits
Despite their smaller trading volumes, retail traders can influence stock prices and hence contribute to market anomalies.
Retail trading, driven by individual investors buying and selling stocks, has a significant impact on market dynamics. Despite their smaller trading volumes, retail traders can influence stock prices and hence contribute to market anomalies. This article delves into the relationship between retail trading and momentum profitability, investigating whether stocks with higher levels of retail trading exhibit stronger momentum effects, offering valuable insights for both academics and practitioners.
Retail Trading and Market Anomalies
Retail investors, often less sophisticated than institutional investors, exhibit behavioral biases that can lead to market anomalies—situations where stock prices deviate from their fundamental values. One such anomaly is momentum trading, a strategy that buys past winners and sells past losers. Historically, momentum strategies have generated significant excess returns, challenging the notion of market efficiency. Recent studies have shown that retail investo…