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Discussion Paper Details

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Title: Individual Investors and Volatility

Author(s): Thierry Foucault, David Sraer and David Thesmar

Publication Date: July 2008

Keyword(s): Idiosyncratic volatility, Noise trading and Retail investors

Programme Area(s): Financial Economics

Abstract: We test the hypothesis that individual investors contribute to the idiosyncratic volatility of stock returns because they act as noise traders. To this end, we consider a reform that makes short selling or buying on margin more expensive for retail investors relative to institutions, for a subset of French stocks. If retail investors are noise traders, theory implies that the volatility of stocks affected by the reform should decrease relative to other stocks. This prediction is borne out by the data. Moreover, around the reform, we observe a significant decrease in (i) the magnitude of returns reversals, and (ii) the Amihud ratio for the stocks affected by the reform relative to other stocks. We show that these findings are also consistent with models in which individual investors, acting as noise traders, are a source of volatility.

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Bibliographic Reference

Foucault, T, Sraer, D and Thesmar, D. 2008. 'Individual Investors and Volatility'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6915