Essays on the Behavior and Performance of Retail Investors

Abstract

In recent years, retail trading in stocks, cryptocurrencies and other assets has become significantly more popular, and since the onset of the Covid-19 pandemic and the shift to a work-from-home regime, it has in many ways become a mainstream activity. In this dissertation, I utilize a proprietary dataset obtained from an international broker to produce new insights about the behavior and performance of this important group of traders. In the first essay, I study the use of leverage by retail traders. Utilizing a major regulatory intervention that limited the amount of leverage that retail brokers may offer on certain financial derivatives, I deploy a difference-in-differences research design and report that leverage is highly detrimental to the wealth of retail traders. I further show that overconfidence and an insufficient understanding of leverage are important contributors to this result. These findings portray a situation in which retail traders make a financial mistake that is so extreme that it may justify a regulatory intervention even in the absence of an apparent market failure. In the second essay, I investigate the implications of the recent shift to a work-from-home regime on retail trading. Exploiting the changes in work-from-home policies within and across countries, I demonstrate that, upon working from home, retail traders pay more attention to their brokerage accounts, trade more and perform better. These findings not only illustrate important changes in the behavior of retail traders but also provide causal support for the literature aiming to link traders’ attention to their performance.