The strategy uses stocks from NYSE, sorting them based on retail trading volume (RTP) and momentum (Mom). Long high momentum stocks in RTP5 and short low momentum stocks in RTP5. Rebalanced monthly.
ASSET CLASS: stocks | REGION: United States | FREQUENCY:
Monthly | MARKET: equities | KEYWORD: Momentum, Profitability
I. STRATEGY IN A NUTSHELL
The strategy trades NYSE stocks using retail activity and momentum signals. Stocks are ranked by Retail Trading Percentage (RTP) from the NYSE ReTrac database and divided into five quintiles. Within each quintile, stocks are sorted by 12-to-2-month momentum. The investor goes long on high-momentum stocks and shorts low-momentum stocks in the top retail quintile (RTP5). The portfolio is value-weighted and rebalanced monthly.
II. ECONOMIC RATIONALE
Retail investors often follow past price trends due to limited resources and analysis, creating mispricings. Stocks with high retail trading and strong momentum exhibit amplified inefficiencies, making them suitable for a long/short momentum strategy.
III. SOURCE PAPER
Retail Trading and Momentum Profitability [Click to Open PDF]
Ling Tak Douglas Chung, Norwegian Business School
<Abstract>
Monthly momentum returns increase monotonically across quintile portfolios of stocks sorted by retail trading participation with a top-minus-bottom spread of 1.42% (t-statistics = 3.46). Stocks that are heavily traded by retail investors exhibit lottery-like features such as low prices, high idiosyncratic volatilities/skewness, and high past maximum returns. Using lottery characteristics to proxy for the extent of retail trading, future momentum profits monotonically increase in the cross-sectional lotteryness of stocks over a 77-year back-testing period for which retail trading data is unavailable. Further analysis shows that lottery-like stocks exhibit stronger comovements that amplify momentum profits.
IV. BACKTEST PERFORMANCE
| Annualised Return | 14.04% |
| Volatility | 19.22% |
| Beta | N/A |
| Sharpe Ratio | 0.73 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
