Financial Markets and Portfolio Management

, Volume 28, Issue 2, pp 111–138

(Un)skilled leveraged trading of retail investors

  • Stephan Meyer
  • Sebastian Schroff
  • Christof Weinhardt
Article

DOI: 10.1007/s11408-014-0225-1

Cite this article as:
Meyer, S., Schroff, S. & Weinhardt, C. Financ Mark Portf Manag (2014) 28: 111. doi:10.1007/s11408-014-0225-1

Abstract

We study the trading behavior of retail investors in the market of leveraged bank-issued retail derivatives, which are designed to encourage excessive trading and speculation. We investigate whether retail investors have private information and benefit disproportionately or whether they gamble without private information. We answer this question along three dimensions: (i) profitability, (ii) news trading, and (iii) transaction costs. We distinguish between derivatives by the type of underlying (index vs. individual stocks). We find that raw returns are negative for derivatives with stocks as the underlying, and only partially positive for those with index as the underlying. Nevertheless, risk-adjusted returns show poor performance, with Sharpe ratios below 0.30. We show that retail investors are attracted by news, but do not have private information prior to news events.

Keywords

Retail investors Gambling Speculation Trading costs  Bank-issued derivatives 

JEL Classification

G10 G14 

Copyright information

© Swiss Society for Financial Market Research 2014

Authors and Affiliations

  • Stephan Meyer
    • 1
  • Sebastian Schroff
    • 2
  • Christof Weinhardt
    • 3
  1. 1.Research Group Financial Market InnovationKarlsruhe Institute of TechnologyKarlsruheGermany
  2. 2.Chair of Banking and Finance SchlossUniversity of HohenheimStuttgartGermany
  3. 3.Institute of Information Systems and MarketingKarlsruhe Institute of TechnologyKarlsruheGermany