סמינר במימון חשבונאות

Speaker:  Joel Peress, INSEAD

We study the causal effect of trading on stock market liquidity. We exploit episodes of sensational news (exogenous to the market) that distract retail investors. On “distraction days” we find that trading activity, liquidity, and volatility all decline among stocks owned predominantly by retail investors. These findings, complemented by additional tests, establish that retail investors contribute to liquidity by serving both as noise traders and as liquidity providers. They also identify adverse selection as an important driver of illiquidity, thereby countervailing recent work that assigns a leading role to inventory risk or questions the usefulness of adverse selection measures.