Empirical Analysis of Effects of VIX on Retail Investor Activity During the Covid-19 Pandemic: Evidence from Robinhood users

Abstract

Objectives

The main objectives of this study were to deepen the understanding of retail investor activity under different market conditions, and to see if the VIX provides predicting power over retail investor activity. The different market conditions were separated as the full timeframe, before the pandemic, and during the pandemic. Secondary object was to shed light on how retail investors perceive VIX, as measure of fear or as a measure of noise.

Summary

This study collected 3-years’ worth of data from VIX and popularity data from retail brokerage Robinhood to measure retail investor behavior between May of 2018 and August of 2020. The findings were analyzed based on various charts of the datasets and regression analysis divided into three timeframes based on level of VIX.

Conclusions

The conclusions of this study are that during market turmoil and higher level of VIX, variation in VIX provides some predictability over retail investor activity, whereas the relationship before the pandemic is non-existent. The results point to VIX being a proxy for noise, as during higher levels of VIX a sharp change to either direction resulted into an increase in retail investor activity with a delay. From the basis of the findings this study, VIX is a viable option as a variable to provide additional explanatory power over retail investor activity in a more comprehensive model.