(Un)skilled leveraged trading of retail investors
- 279 Downloads
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.
KeywordsRetail investors Gambling Speculation Trading costs Bank-issued derivatives
JEL ClassificationG10 G14
The Financial support from Boerse Stuttgart is gratefully acknowledged. The views expressed here are those of the authors and do not necessarily represent the views of Boerse Stuttgart. The authors thank an anonymous referee for valuable feedback.
- Anderson, A.: Is online trading gambling with peanuts? In: Technical report, Swedish Institute for Financial Research (2008)Google Scholar
- Entrop, O., Schober, A., Wilkens, M.:. The pricing policy of banks on the German secondary market for leverage certificates: interday and intraday effects. In: Working Paper (2011)Google Scholar
- Gaoa, X., Linb, T.-C.: Do individual investors trade stocks as gambling? Evidence from repeated natural experiments. In: Working Paper (2012)Google Scholar
- Kelley, E.K., Tetlock, P.C.: How wise are crowds ? Insights from retail orders and stock returns. J. Financ. 63(3), 1229–1265 (2012)Google Scholar
- Page, J.K., Spalt, O.G., Kumar, A.: Gambling and comovement. In: Working Paper (2012)Google Scholar
- Rubinstein, M., Reiner, E.: Breaking down the barriers. Risk 4, 28–35 (1991)Google Scholar
- Schmitz, P., Weber, M.: Buying and selling behavior of individual investors in option-like securities. Die Betr. 5 (2012)Google Scholar
- Storkenmaier, A.: Financial Markets and Public Information. KIT Scientific Publishing, Karlsruhe (2011)Google Scholar