Individual Investors and Volatility

Thierry Foucault, David Sraer, David Thesmar
2009 Social Science Research Network  
4 A previous version of the paper was entitled "Chaining up noise traders." We are particularly grateful to Ulrike Malmendier and Mark Seasholes for their suggestions on a previous version. We also thank Bruno Biais, Hans Degryse, Paul Ehling, Andras Fulop, Laurence Lescourret, Steven Ongena, Evren Örs, Christophe Perignon, Richard Priestley, and seminar participants at BI Norwegian School of Management, ESSEC, Tilburg University, and Toulouse University for their comments. We are also grateful
more » ... to EUROFIDAI and Albert Menkveld for providing some of the data used in this paper, and o¢ cials of the Paris Bourse for their guidance regarding the operations of the French forward equity market. Thierry Foucault and David Thesmar gratefully acknowledge the support of the HEC Foundation. Thierry Foucault also thanks Paris Europlace for its support. The usual disclaimer applies. Abstract Individual Investors and Volatility We test the hypothesis that individual investors contribute to the idiosyncratic volatility of stock returns because they act as noise traders. To this end, we consider a reform that makes short selling or buying on margin more expensive for retail investors relative to institutions, for a subset of French stocks. If retail investors are noise traders, theory implies that the volatility of stocks a¤ected by the reform should decrease relative to other stocks. This prediction is borne out by the data. Moreover, around the reform, we observe a signi...cant decrease in (i) the magnitude of returns reversals, and (ii) the Amihud ratio for the stocks a¤ected by the reform relative to other stocks. We show that these ...ndings are also consistent with models in which individual investors, acting as noise traders, are a source of volatility.
doi:10.2139/ssrn.1105470 fatcat:zq6ydry6bnhz5ajpbeqietnira