Essays on retail trading

This dissertation comprises three independent essays unified by a common theme: retail investor behavior. The first essay investigates which bond characteristics matter most for retail investors in the Brazilian government bond market through the Tesouro Direto program. Using the program’s transaction-level dataset and constructing investor-level bond portfolios, we apply a factor-based methodology to identify the key dimensions driving retail demand. We find that unit price, time-to-maturity, and yield are the primary characteristics shaping investment decisions. Moreover, we identify three distinct investor clienteles: capital-preserving investors, risk-taking investors who take active positions along the yield curve, and investors who hold bonds for specific savings goals. The second essay documents how retail investors become marginal liquidity providers in the equity market. On days of elevated adverse-selection risk, retail investors expand their market participation, absorbing the directional demand of institutional investors through passive limit orders. On such days, retail investors incur negative day-zero returns of, on average, 117 basis points, with no subsequent reversal, implying an annual wealth transfer of approximately USD 1 billion. Using a shift-share identification strategy, we estimate that a 1% increase in retail trading volume is associated with a 0.97 standard-deviation improvement in a composite market quality index. The third essay examines the relationship between retail equity trading activity and periods of heightened cryptocurrency salience. Using granular transaction-level data on retail investors in the Brazilian stock market from 2012 to 2023, we document a negative relationship between equity trading and days on which cryptocurrencies attract abnormal attention. Days of high cryptocurrency salience are associated with 6% fewer active retail investors and a decline of approximately USD 50 million in trading volume. The effect is more pronounced among younger investors and is concentrated in technology-related occupations.