Study Indicates Retail Investors Sell When Prices Decline

By on April 27, 2011

Academics Tarun Chordia, Amit Goyal and Qing Tong conducted a study, available at SSRN, showing that small cap stocks show stronger correlation during market declines.

The abstract reads:

Pairwise stock correlations increase by 27% on average when stock returns are negative. It is trading activity in small stocks that leads to higher correlations when returns are negative. We provide evidence consistent with the hypothesis that co-ordinated selling by retail investors drives this asymmetry in correlations. The co-ordinated selling activity by retail investors is triggered by negative market returns.

The 33 page study is available in a pdf at the source below.

Source: SSRN

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