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The impact of fractional trading on risk aversion for non-professional investors

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  • Tripathi, Janhavi Shankar
  • Rengifo, Erick W.

Abstract

We study the impact of fractional trading (FT) on non-professional investors' decision-making under uncertainty. Using the expected utility framework, we show that with the recent easiness to trade in stock markets and with the option to buy or sell a fraction of a share of a stock or ETF (exchange-traded fund), the risk appetite of non-professional investors might have gone up, increasing market participation and demand for stocks. Furthermore, we show that this change in the non-professional investor's risk aversion behavior varies by household income levels. Based on constructed probabilities, we estimate that approximately 83 billion dollars have been newly invested in stock market post-FT. Our results suggest that easy access to trade stocks and FT allows households with lower discretionary income a new tool to diversify their portfolio and participate in the stock markets by investing in different stocks and ETFs while at the same time having a significant impact on the stocks' price levels and price dynamics observed in the markets.

Suggested Citation

  • Tripathi, Janhavi Shankar & Rengifo, Erick W., 2023. "The impact of fractional trading on risk aversion for non-professional investors," Finance Research Letters, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322007231
    DOI: 10.1016/j.frl.2022.103547
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    References listed on IDEAS

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    More about this item

    Keywords

    Fintech; Fractional trading; Household finance; Investor behavior; Portfolio theory; Risk aversion;
    All these keywords.

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G4 - Financial Economics - - Behavioral Finance
    • G5 - Financial Economics - - Household Finance

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