Are Household Investors Noise Traders? Evidence from Belief Dispersion and Stock Trading Volume

We document a robust positive relationship between the belief dispersion about macroeconomic conditions among household investors and the stock market trading volume, using more than 30 years of household survey data and a novel approach to measuring belief dispersions. Notably, such a relationship prevails even after various series of professional analysts’ belief dispersions are controlled for. Consistent with a causal effect, such a relationship is most pronounced for belief dispersion among individuals who are most likely to own stocks and for trading volume of stocks that are most visible to household investors. Finally, we present suggestive evidence that the dispersion of changes in belief is also positively associated with the stock trading volume. Our analysis suggests that household investors, frequently viewed as uninformed noise traders, potentially possess and trade on information not available to professional investors. ∗We thank Robert Barsky, Campbell Harvey, Chris Carroll, Richard Green, Harrison Hong, Stephen Sharpe, Tyler Shumway, George Tauchen, Larry Wall, Wei Xiong, an anonymous editor, an anonymous referee, and seminar participants at the Federal Reserve Board and the 2010 Federal Reserve System Finance Committee Meeting for helpful discussions. We thank Patrick McCabe for his help on the ICI data, Eugenio Pinto for I/B/E/S data, and Min Wei and Scott Konzem for Blue Chip data. The views expressed herein are those of the authors and do not necessarily reflect the views of the Board of Governors or its staff.