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Retail Investor Sentiment and Return Comovements

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  • ALOK KUMAR
  • CHARLES M.C. LEE

Abstract

Using a database of more than 1.85 million retail investor transactions over 1991–1996, we show that these trades are systematically correlated—that is, individuals buy (or sell) stocks in concert. Moreover, consistent with noise trader models, we find that systematic retail trading explains return comovements for stocks with high retail concentration (i.e., small‐cap, value, lower institutional ownership, and lower‐priced stocks), especially if these stocks are also costly to arbitrage. Macroeconomic news and analyst earnings forecast revisions do not explain these results. Collectively, our findings support a role for investor sentiment in the formation of returns.

Suggested Citation

  • Alok Kumar & Charles M.C. Lee, 2006. "Retail Investor Sentiment and Return Comovements," Journal of Finance, American Finance Association, vol. 61(5), pages 2451-2486, October.
    • Handle: RePEc:bla:jfinan:v:61:y:2006:i:5:p:2451-2486
    DOI: 10.1111/j.1540-6261.2006.01063.x
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