Do Individual Investors Drive Volatility? Evidence from the Robintrack Dataset

Investors play an important corporate governance role in influencing firm behavior through their investment choices. Moreover, individual investors play an increasingly important role in financial markets with their behavior shaping financial markets. This chapter complements the corporate governance and investor literature by widening our understanding of the impact of individual investor behavior through an exploration of the relationship between stock price volatility and individual investor ownership. Focusing on users of the Robinhood stock trading and investment application (App), we utilize the Robintrack dataset, which contains popularity metric data collected from the Robinhood brokerage and study 3765 ordinary stocks. We begin by exploring the contemporaneous relationship between individual investors and volatility to determine whether individual investors are associated with more volatile stocks. Based on the literature, we predict that individual investors may be associated with more volatile stocks; however, some risk-averse individual investors may systematically select lower-volatility stocks. Then, we question whether individual investors are attracted to volatility and whether individual investor interest causes volatility. Our main result indicates that individual investors are associated with more volatile stocks, even after accounting for company size. The positive relationship between volatility and individual investor holdings is consistent with two stories. First, securities that exhibit higher volatilities may attract individual investors. Second, higher volatility may result from an increase in individual investor interest. Our findings offer implications for firms and policy makers seeking to better understand the behavior and impact of individual investors in financial markets.