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  • 2022
  • Working Paper

Retail Investors’ Contrarian Behavior Around News, Attention, and the Momentum Effect

By: Cheng (Patrick) Luo, Enrichetta Ravina, Marco Sammon and Luis M. Viceira
  • Format:Print
  • | Language:English
  • | Pages:53
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Abstract

Using a large panel of U.S. brokerage accounts trades and positions, we show that a large fraction of retail investors trade as contrarians after large earnings surprises, especially for loser stocks, and that such contrarian trading contributes to post earnings announcement drift (PEAD) and price momentum. Indeed, when we double-sort by momentum portfolios and retail trading flows, PEAD and momentum are only present in the top two quintiles of retail trading intensity. Finer sorts confirm the results, as do sorts by firm size and institutional ownership level. We show that the investors in our sample are representative of the universe of U.S. retail traders, and that the magnitude of the phenomena we describe indicate a quantitively substantial role of retail investors in generating momentum. Alternative hypotheses, such as the disposition effect and stale limit orders, do not explain retail contrarian trading. Younger traders are more likely to be contrarian, and a firm’s dividend yield, leverage, size, book to market, and analyst coverage are associated with the fraction of contrarian trades they face around earnings announcements. Attentive investors are more likely to be contrarians.

Keywords

Retail Investors; Post Earnings Announcement Drift; Price Momentum; Behavioral Finance; Investment; Demographics

Citation

Luo, Cheng (Patrick), Enrichetta Ravina, Marco Sammon, and Luis M. Viceira. "Retail Investors’ Contrarian Behavior Around News, Attention, and the Momentum Effect." Working Paper, June 2022.
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About The Authors

Marco Sammon

Finance
→More Publications

Luis M. Viceira

Finance
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    Pershing Square's Pandemic Trade Teaching Note Courseware

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    The Disappearing Index Effect

    By: Robin Greenwood and Marco Sammon
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    The Retail Habitat

    By: Toomas Laarits and Marco Sammon
More from the Authors
  • Pershing Square's Pandemic Trade Teaching Note Courseware By: Luis M. Viceira and Emil N. Siriwardane
  • The Disappearing Index Effect By: Robin Greenwood and Marco Sammon
  • The Retail Habitat By: Toomas Laarits and Marco Sammon
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