The impact of retail flows on asset prices
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2025-04-29
Autores
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Giovannetti, Bruno Cara
Chague, Fernando Daniel
Guimarães, Bernardo de Vasconcellos
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Resumo
Can a large irrational buying pressure affect stock prices? We demonstrate that the answer hinges on arbitrageurs’ ability to identify uninformed flows in real time. We analyze Brazilian retail investor data, comparing the price impacts of two uninformed flows differing solely in predictability. Unexpected uninformed flows have over six times the price impact of expected ones, with the return differential persisting for weeks. This is in line with a model of an asset market in which rational arbitrageurs can’t fully differentiate between informed and uninformed flows, so that unpredictable irrational flows exert significantly greater price pressure than predictable ones, even though both are equally uninformed. Consequently, price pressure is greater when counterparty uncertainty is greater, even in the absence of typical limits to arbitrage. These findings highlight the role of retail investor behavior in shaping price formation and market efficiency. More broadly, this “apples-to-apples” comparison of expected and unexpected flows offers a novel contribution to the literature on how demand shifts influence asset prices.