May
19
Some interesting research, from Humbert X.
May 19, 2025 |
Resolving a Paradox: Retail Trades Positively Predict Returns but are Not Profitable
Posted: 18 Feb 2021 Last revised: 22 Mar 2023
Brad M. Barber, University of California, Davis
Terrance Odean, University of California, Berkeley - Haas School of Business
Retail order imbalance positively predicts returns, but on average retail investor trades lose money. Why? Order imbalance tests equally weight stocks, but retail purchases concentrate in attention-grabbing stocks that subsequently underperform. Long-short strategies based on extreme quintiles of retail order imbalance earn dismal annualized returns of -15.3% among stocks with heavy retail trading but earn 6.8% among other stocks. Our results reconcile the literatures on the performance of retail investors, the predictive content of retail order imbalance, and attention-induced trading and returns. Smaller retail trades concentrate more in attention-grabbing stocks and perform worse.
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