Understanding Retail Investors: Evidence from China

Using comprehensive account-level data from 2016 to 2019, we examine retail investor trading behavior in the Chinese stock market. We separate millions of retail investors into five groups by their account sizes and document strong heterogeneity in their trading dynamics and performance. Retail investors with smaller account sizes cannot predict future price movements correctly, in the sense that they buy future losers and sell future winners. Their trading patterns are momentum over daily horizons, but become contrarian over weekly horizons. These investors fail to process public news and display behavioral properties such as overconfidence and gambling preferences. In sharp contrast, retail investors with larger account balances predict future returns correctly, display contrarian trading patterns, incorporate public news in their trading, and their return predictive power are stronger in stocks which are more attractive to investors with behavioral biases.