Small investor sentiment, differences of opinion and stock overvaluation

Recent research shows that small trade imbalances are negatively associated with future stock returns. I find that this negative association only exists when stocks have initially been mispriced. In addition, mispricing occurs before the sentimental trading of small investors. In stocks with high op...

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Bibliographic Details
Published inJournal of financial markets (Amsterdam, Netherlands) Vol. 19; pp. 219 - 246
Main Author Qian, Xiaolin
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.06.2014
Subjects
Mispricing
Noise trader risk
Small trade imbalances
Small trade imbalances
G14
Noise trader risk
G11
Mispricing
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Summary:Recent research shows that small trade imbalances are negatively associated with future stock returns. I find that this negative association only exists when stocks have initially been mispriced. In addition, mispricing occurs before the sentimental trading of small investors. In stocks with high opinion divergence, buying pressure from small investors deters the realization of negative information. Therefore, trades from retail investors do not directly cause mispricing, but they prevent price discovery and facilitate mispricing. •I study the pricing of small trade imbalances (STI) under differences of opinion.•STI is negatively related to returns only when differences of opinion are high.•Retail investors׳ trading prevents arbitrage rather than creating mispricing.•Dispersion of opinion is more significantly priced when STI is high.•Retail investors׳ trading deters the realization of negative information.
ISSN:1386-4181
1878-576X
DOI:10.1016/j.finmar.2014.03.005