THE JOURNAL OF FINANCE • VOL. LXVI, NO. 4 • AUGUST 2011

Individual Investors and Volatility

THIERRY FOUCAULT, DAVID SRAER, and DAVID J. THESMAR

ABSTRACT

We show that retail trading activity has a positive effect on the volatility of stock
returns, which suggests that retail investors behave as noise traders. To identify
this effect, we use a reform of the French stock market that raises the relative cost
of speculative trading for retail investors. The daily return volatility of the stocks
affected by the reform falls by 20 basis points (a quarter of the sample standard
deviation of the return volatility) relative to other stocks. For affected stocks, we also
find a significant decrease in the magnitude of return reversals and the price impact
of trades.