Individual Investors and Volatility





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    • Foucault and Thesmar are from HEC, Paris. David Sraer is from Princeton University. We are particularly grateful to Ulrike Malmendier, Mark Seasholes, an anonymous referee, and Campbell Harvey (the Editor) for their suggestions. We also appreciate the comments of Christophe Bisière, Hans Degryse, Paul Ehling, Andras Fulop, Terrence Hendershott, Ravi Jagganathan, Eugene Kandel, Laurence Lescourret, Steven Ongena, Evren Örs, Christophe Perignon, Richard Priestley, Dimitri Vayanos, Jialin Yu, Jiang Wang, and seminar participants at the 2009 American Finance Association (AFA) Meetings in San Francisco, the AFFI conference in Paris, BI Norwegian School of Management, Booth School of Business, ESSEC, Tilburg University, and Toulouse University. We thank EUROFIDAI for providing some of the data used in this paper, and officials of the Paris Bourse for their guidance regarding the structure of the French stock market. We also thank Jéröme Dugast and Marcus Fearnley for excellent research assistance. Thierry Foucault and David Thesmar gratefully acknowledge the support of the HEC Foundation. Thierry Foucault also thanks Paris Europlace for its support. The usual disclaimer applies.


We show that retail trading activity has a positive effect on the volatility of stock returns, which suggests that retail investors behave as noise traders. To identify this effect, we use a reform of the French stock market that raises the relative cost of speculative trading for retail investors. The daily return volatility of the stocks affected by the reform falls by 20 basis points (a quarter of the sample standard deviation of the return volatility) relative to other stocks. For affected stocks, we also find a significant decrease in the magnitude of return reversals and the price impact of trades.