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Resolving a Paradox: Retail Trades Positively Predict Returns but Are Not Profitable

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  • Barber, Brad M.
  • Lin, Shengle
  • Odean, Terrance

Abstract

Retail order imbalance positively predicts returns, but on average retail investor trades lose money. Why? Order imbalance tests equal-weighted stocks, but retail purchases concentrate on attention-grabbing stocks that subsequently underperform. Long–short strategies based on extreme quintiles of retail order imbalance earn dismal annualized returns of −14.8% among stocks with heavy retail trading but earn 6.6% among other stocks. Our results reconcile the literatures on the performance of retail investors, the predictive content of retail order imbalance, and attention-induced trading and returns. Smaller retail trades concentrate more on attention-grabbing stocks and perform worse.

Suggested Citation

  • Barber, Brad M. & Lin, Shengle & Odean, Terrance, 2024. "Resolving a Paradox: Retail Trades Positively Predict Returns but Are Not Profitable," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 59(6), pages 2547-2581, September.
    • Handle: RePEc:cup:jfinqa:v:59:y:2024:i:6:p:2547-2581_3
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