Do Retail Traders Destabilize Financial Markets? An Investigation Surrounding the COVID-19 Pandemic

Autor: Awaid Yasin, Ahmed S. Baig, Hassan A. Butt, Benjamin M. Blau
Rok vydání: 2021
Předmět:
Zdroj: SSRN Electronic Journal.
ISSN: 1556-5068
DOI: 10.2139/ssrn.3782159
Popis: Economic theory suggests that speculative trading can lead to instability in financial markets. This study extends the literature and investigates the impact of retail (speculative) trading on the volatility of financial markets with a focus on the COVID-19 pandemic. Our tests are based on the data on marketable retail trades identified using the Boehmer et al. (2021) algorithm and supplemented with retail ownership data obtained from the discount brokerage Robinhood, a pioneer of commission free trading in the US. Using a series of novel econometric methods, we document a causal negative impact of speculative trading on the stability of the financial markets that is particularly enhanced during the pandemic. These results shed light on the enhanced role of retail traders as an additional destabilizing force during market stress conditions. To further validate our findings, we study the relation between retail trading activity and volatility surrounding the 2008-09 financial crisis. The results are consistent with the COVID-19 period as we find that retail traders indeed have an enhanced destabilizing role during market stress conditions.
Databáze: OpenAIRE