Abstract
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 onthe volatility of financial markets with a focus on the COVID-19 pandemic. Our tests are basedon the data on marketable retail trades identified using the Boehmer et al. (2021) algorithm andsupplemented with retail ownership data obtained from the discount brokerage Robinhood, apioneer of commission free trading in the US. Using a series of novel econometric methods, wedocument a causal negative impact of speculative trading on the stability of the financial marketsthat is particularly enhanced during the pandemic. These results shed light on the enhancedrole of retail traders as an additional destabilizing force during market stress conditions. Tofurther validate our findings, we study the relation between retail trading activity and volatilitysurrounding the 2008-09 financial crisis. The results are consistent with the COVID-19 periodas we find that retail traders indeed have an enhanced destabilizing role during market stressconditions.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
