Are Household Investors Noise Traders: Evidence from Belief Dispersion and Stock Trading Volume

Abstract

We document a robust positive relationship between the belief dispersion about macroeconomic conditions among household investors and the stock market trading volume, using more than 30 years of household survey data and a novel approach to measuring belief dispersions. Notably, such a relationship prevails even after various series of professional analysts' belief dispersions are controlled for. Consistent with a causal effect, such a relationship is most pronounced for belief dispersion among individuals who are most likely to own stocks and for trading volume of stocks that are most visible to household investors. Finally, we present suggestive evidence that the dispersion of changes in belief is also positively associated with the stock trading volume. On balance, our analysis implies that household investors, frequently believed to trade randomly as noise traders, appear to trade on their beliefs.