Author(s): Daniel Graves
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This paper establishes a new empirical finance puzzle, the retail alignment puzzle: aggregate retail trader purchases and sales are nearly perfectly correlated across time and in the cross section of equities despite retail traders representing a small fraction of exchange volumes and being commonly represented as displaying lopsided flow patterns. Consistent with this puzzle, retail purchases and sales in the cross section are linearly predicted by the same two attention-associated factors, recent return salience and recent volume, with regressions on purchases and sales possessing almost identical coefficients. Using both directly measured attention through Google Trends search volumes and common indirect measures of attention such as volumes and extreme returns, I show that surges in retail attention consistently generate both large trading volumes and proportionally limited net trading. I then use an equilibrium disagreement model to show analytically and through simulations that while positive shocks to retail attention, sentiment, and disagreement all increase price, only shifts in attention are capable of reproducing empirical volume and return patterns. This paper's results suggest that attention is one of the core drivers of retail volume in common stocks.
Repository Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4531906
Published: 2024-12-28 14:24:04 PT
Stage: Working Paper
Fields: Financial Economics
Research Group(s): Playground
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Versions: v1 (12/28/2024)