Understanding Retail Investor: Evidence from China 2021 | ABFER | 13 October 2021 | Webinar

Using comprehensive account-level data from 2016 to 2019, the authors examine retail investor trading behavior in the Chinese stock market. The authors separate millions of retail investors into five groups by their account sizes and document strong heterogeneity in their trading dynamics and performance. Retail investors with smaller account sizes cannot predict future price movements correctly, in the sense that they buy future losers and sell future winners. These investors fail to process public news and display behavioral biases such as overconfidence and gambling preferences. In sharp contrast, retail investors with larger account balances predict future returns correctly, incorporate public news in their trading, and gain more in stocks which are more attractive to investors with behavioral biases. For liquidity provision, the smaller retail investors follow daily momentum strategies, demanding immediate liquidity, while they become contrarian over weekly horizons, and they contribute positively towards firm-level liquidity. On the contrary, larger retail investors ae contrarian at daily horizons, providing immediate liquidity, but their potentially informed trades demand liquidity over longer terms.

2021 Speakers

Xiaoyan Zhang
Professor of Finance, Associate Dean, PBC School of Finance, Tsinghua University

Terrance Odean
Rudd Family Foundation Professor of Finance, Haas School of Business, University of California, Berkeley

Michael Song
Professor at the Department of Economics, Chinese University of Hong Kong and Senior Fellow, ABFER