Behavioral Finance, Household Finance, Social Networks, Retail Trading and Asset Prices, Financial Intermediation
Social considerations can produce behavioral biases. Using novel data from a social network linked to individual investment accounts, traders increase their susceptibility to the disposition effect following exposure to the network. To claim causality, I used the staggered entry of retail brokerages into partnerships with the social networking platform, which is a necessary precursor for traders to access the network. Data on common stock trading at a discount brokerage and a comparison to network simulations provides additional evidence. These findings are consistent with traders strategically waiting until good states to exchange information and reallocate resources.
"Can Leverage Constraints Make Overconfident Investors Better Off?" (2013)
Leverage is inversely related to individual investor performance. Causality comes from CFTC regulation capping the maximum permissible leverage available to U.S. retail traders in the foreign exchange spot market and a comparison to a control group of unregulated European traders who trade on the same brokerages. Overconfidence jointly explains high leverage and subsequent poor performance. Supplemental Materials
The patterns of communication between traders supports the growth of active strategies. Using novel data from a social network linked to individual investment accounts, traders broadcast their own successes, while recipients trade more when their peers perform well.
"Do Traders Learn from Others' Failures?"
This paper is among the first to make causal claims about the role of retail trading in the formation of asset prices. We examine a plausibly exogenous source of variation in retail stock trading that has both time-series and cross-sectional variation across the U.S. This frictions made trading less costly for retail investors and increased their ownership of local stocks. We then examine how this friction effects the efficiency of stock prices.
"The Adverse Selection Problem in Retail Markets: A Field-Experiment on a Discount Brokerage" w/ Juhani Linnainmaa, FRA Early Ideas Session
"Competition Creates Complexity" w/ Tony Cookson