Finance seminar - Dr Dongchen Zou - Indiana University

A seminar by Assistant Professor Dongchen Zou from Indiana University

Title: Buying the Dip: Return-Contingent Retail Trades

Abstract: Using a novel dataset of daily order flows from actual retail trades for 2017–2024, we document a nonlinear and highly asymmetric relation between retail activity and past returns. Specifically, retail inflows rise sharply following large price declines, whereas selling after gains is weak. This 'buying the dip' pattern is stable across return horizons and persists through the 2020–2021 retail trading surge. We demonstrate that this behavior is not driven by stock-specific clientele effects, but is instead linked to episodes of mandated institutional selling. Retail purchases are strongest when institutional selling pressure coincides with negative returns and tightening risk constraints. Consistent with retail investors providing liquidity during distress, we find that retail purchases support market quality and lower transaction costs.