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Retail Investor Sentiment and Return Comovements




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    • Alok Kumar is at the Red McCombs School of Business, University of Texas at Austin. Charles Lee is at Barclays Global Investors and the Johnson Graduate School of Management, Cornell University. We would like to thank an anonymous referee, an associate editor, Robert Battalio, Xiang Cai, Shane Corwin, Richard Frankel, William Goetzmann, Hans Heidle, Dong Hong, Zoran Ivkovich, George Korniotis, J. Spencer Martin, Robert Masson, Victor McGee, Terrance Odean, Ted O'Donoghue, Galina Ovtcharova, Vicente Pons, Paul Schultz, Mark Seasholes, Robert Stambaugh (the editor), Kent Womack, and Jeff Wurgler, as well as seminar participants at Cornell, the University of Illinois (Chicago), London Business School, Massachusetts Institute of Technology, Notre Dame, the 2003 WFA Meetings (Los Cabos, Mexico), and the Spring 2004 NBER Behavioral Finance Working Group Meetings (Chicago, IL) for helpful discussions and comments. We thank Itamar Simonson for making the investor data available to us and Terrance Odean for answering numerous questions about the investor database. The I/B/E/S data were provided by Thomson Financial as part of a broad academic program to encourage earnings expectations research. Finally, we thank Lubos Pástor for providing the liquidity factor data. All remaining errors and omissions are our own.


Using a database of more than 1.85 million retail investor transactions over 1991–1996, we show that these trades are systematically correlated—that is, individuals buy (or sell) stocks in concert. Moreover, consistent with noise trader models, we find that systematic retail trading explains return comovements for stocks with high retail concentration (i.e., small-cap, value, lower institutional ownership, and lower-priced stocks), especially if these stocks are also costly to arbitrage. Macroeconomic news and analyst earnings forecast revisions do not explain these results. Collectively, our findings support a role for investor sentiment in the formation of returns.