Retail Investors and Momentum

We explore the link between momentum and retail investing via an identification strategy in China, where retail investors dominate. We argue that due to a roundlot restriction, small retail investors are less likely to hold and trade stocks with high nominal prices, and find supporting evidence. We then show that while there is no momentum in the Chinese market on aggregate, there is indeed strong momentum in high-priced stocks. Short-term reversals are stronger in the low-priced stocks. Mutual fund holdings enhance momentum. Further, small investor participation increases and momentum weakens following splits in high-priced stocks. Taken together, the results support the notion that short-horizon retail trades contribute to short-term reversals, and attenuate momentum arising from institutional underreaction to long-lived information