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RFS Advance Access originally published online on May 14, 2008
Review of Financial Studies 2008 21(3):1123-1151; doi:10.1093/rfs/hhn049
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© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.

Small Trades and the Cross-Section of Stock Returns

Soeren Hvidkjaer
INSEAD and University of Maryland

Address correspondence to Soeren Hvidkjaer, INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France, or e-mail: soeren.hvidkjaer{at}insead.edu

JEL Classification: G11, G12, G14


  Abstract

This paper uses volume arising from small trades to analyze the relationship between retail investor trading behavior and the cross-section of future stock returns. The central finding is that stocks with intense sell-initiated small-trade volume, measured over the past several months, outperform stocks with intense buy-initiated small-trade volume. This return difference accrues from the first month after the portfolio formation up to two years later. Among small- and medium-sized firms, the return difference continues in the third year. The results suggest that stocks favored by retail investors subsequently experience prolonged underperformance relative to stocks out of favor with retail investors.

This paper benefited from the comments of Pete Kyle, Mark Loewenstein, Toby Moskowitz (the editor), Natalia Piqueira, Andrey Ukhov, Masahiro Watanabe, two anonymous referees, and seminar participants at the 2007 AFA meetings, BI Norwegian School of Management, Copenhagen Business School, the EFM Symposium on Behavioral Finance, George Washington University, INSEAD, Norwegian School of Economics and Business, University of Amsterdam Empirical Asset Pricing Retreat, Purdue University, SOAS University of London, Temple University, University of Maryland, and University of Virginia.


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