Retail investors buying high risk stocks when sentiment is bullish leads to their overpricing and eventual underperforming, according to new research from Warwick Business School.
The same retail traders also stay out of the market when market sentiment is negative leading to high risks stocks outperforming. Constantinos Antoniou, Assistant Professor of Finance and Behavioural Science at Warwick Business School, says: “This is because such unsophisticated traders, who may often face leverage constraints or simply be averse to borrowing, prefer high beta stocks during optimistic periods, as these promise higher perceived benefits from trading”.
The research, using NYSE, AMEX and Nasdaq listed stock data from 1996 to 2010, demonstrates that the CAPM model has broken down, according to Antoniou. CAPM is the traditional capital asset pricing model that states that the more risky a stock the higher its returns and visa versa.