The Rise of the Online Investor During COVID-19: A Behavioural Finance Analysis into Retail Investor Sentiment

Alex Martinez Rigual

Student thesis: Master thesis


This thesis aims to examine whether U.S. financial markets experience waves of irrational market sentiment during large macroeconomic shocks to the economy. Large scale shocks to the economy, such as the bubble, are notorious for their breeches of market efficiency. As a result of COVID-19, we are currently in the middle of one of the most profound shocks in modern history; this offers a unique setting to analyse the workings of financial markets. The goal will be achieved through a study based on behavioural finance that will concentrate on a possible source of the market sentiment –noise traders. Behavioural finance is a response to the limitations of neoclassical theory; thus, the critical assumptions of rational theory will be examined to contextualise this study. In particular, the thesis will analyse how noise traders have reacted to this crisis and whether as a group display signs of unusually high risk-seeking behaviour and irrationality. To further contextualise the study, the key actors and events that influenced the development of the current situation will be discussed. The analysis will concentrate on breaking down the investment behaviour of noise traders through their choice of investments, identifying their risk profile and propensity to speculate. This will be done through a liquidity analysis on Robinhood investors'most bought long stock positions, creating a Robinhood portfolio. The liquidity analysis is inspired by the work of Baker, Stein & Wurglers' (2004, 2006) work on market sentiment; they employed the share-turnover ratio to asses market liquidity and use high-levels of liquidity as a proxy for market sentiment. The analysis finds that during the development of the COVID-19 pandemic share-turnover in the Robinhood portfolio increases. The share-turnover moves from 0.94% before the pandemic to 2.24% during the pandemic, a sign of heightened market sentiment. In addition to a heightened sentiment, the share-turnover ratio had significant explanatory power for price changes in the Robinhood portfolio and an S&P 500 ETF used as a benchmark when applied selectively to the period before and after the Pandemic. Lastly, the Robinhood portfolio showed that Robinhood investors have a risk-seeking behaviour as the Robinhood portfolio had a Beta of 1.56.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2020
Number of pages61