We investigate the relationship between retail investor sentiment and stock returns in the Korean stock market using intraday transaction and order flow data. The assertion that changes in investor sentiment have a significant effect on asset returns rests on two assumptions. First, the aggregate trading of retail investor is systematic. Second, arbitrage is limited. We find the trades of retail investors are significantly correlated, and moreover, that this systematic retail trading can help explain monthly stock return variation even after controlling commonly used asset pricing factors. Furthermore, we find that the incremental power of retail trading behavior in explaining return comovements is larger and more significant for stocks that are actively traded by retail investors and that are difficult to arbitrage. These findings suggest that retail investor sentiment which is reflected in their trading activities plays a role in price formation. In addition, we distinguish between market orders and executed limit orders, and find that market order trades of retail investors are more highly correlated than limit order trades. This is consistent with the argument that market orders are aggressive trades and, therefore, a better measure of investor sentiment.