Equity Market Implications of the Retail Investment Boom

 Swiss Finance Institute Research Paper No. 21-12

48 Pages Posted: 2 Feb 2021 Last revised: 19 Feb 2021

Philippe van der Beck

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Coralie Jaunin

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Swiss Finance Institute

Date Written: January 30, 2021

Abstract

Retail trading activity has soared during the COVID-19 pandemic. This paper quantifies the impact of the retail investment boom on the US stock market within a structural model. Using account holdings data from the online trading platform “Robinhood Markets Inc.” and 13F filings, we estimate retail and institutional demand curves and derive aggregate pricing implications via market clearing. The inelastic nature of institutional demand allows Robinhood investors to have a substantial effect on stock returns during the COVID-19 pandemic. Despite their negligible market share of 0.2%, we find that Robinhood traders account for over 7% of the cross-sectional variation in stock returns during the second quarter of 2020. We furthermore show that without the surge in retail trading activity the aggregate market capitalization of the smallest quintile of US stocks would have been over 30% lower. Lastly, Robinhood traders are able to affect the price of some large individual companies that are being held primarily by passive institutional investors.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3776421