Are retail traders compensated for providing liquidity?
Name
Barrot_Are retail traders.pdf
Description
Submitted version
Size
318.75 KB
Format
Adobe PDF
Checksum (MD5)
2bfd371caa2c3728bb4775b371c8acf8
Author(s)
Barrot, Jean-Noel
Kaniel, Ron
Sraer, David
Date Issued
2016
Journal
Journal of Financial Economics
Publisher
Elsevier BV
Citation
Barrot, J. N., R. Kaniel, and D. Sraer. "Are Retail Traders Compensated for Providing Liquidity?" Journal of Financial Economics (2016).
Version
Original manuscript
Abstract
© 2016 Elsevier B.V.. This paper examines the extent to which individual investors provide liquidity to the stock market and whether they are compensated for doing so. We show that the ability of aggregate retail order imbalances, contrarian in nature, to predict short-term future returns is significantly enhanced during times of market stress, when market liquidity provisions decline. While a weekly rebalanced portfolio long in stocks purchased and short in stocks sold by retail investors delivers 19% annualized excess returns over a four-factor model from 2002 to 2010, it delivers up to 40% annualized returns in periods of high uncertainty. Despite this high aggregate performance, individual investors do not reap the rewards from liquidity provision because they experience a negative return on the day of their trade and they reverse their trades long after the excess returns from liquidity provision are dissipated. During the financial crisis, French active retail stock traders stepped up to the plate, increased stock holdings, and provided liquidity. In contrast, mutual fund investors fled from delegation by selling their mutual funds.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-NonCommercial-NoDerivs License
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1016/J.JFINECO.2016.01.005
