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Using proprietary data on bank-issued knock-out warrants, we find that individual investors, on aggregate, bet on price reversals. In a simple model we demonstrate that a mechanical channel due to market and product characteristics may account for investors' betting on reversals, even if investors' purchasing and selling decisions are independent of past returns. Our empirical results suggest that the mechanical channel can explain almost one half of the associationbetween past returns and individual investors' order flow, while the rest can be attributed to the disposition effect, that is, investors' higher propensity to sell assets from their portfolios that have appreciated.

Do Individual Investors Consciously Speculate on Reversals? Evidence from Leveraged Warrant Trading