Work

Extrapolative Bubbles and Trading Volume

Year: 2021

Type: article

Abstract: We propose an extrapolative model of bubbles to explain the sharp rise in prices and volume observed in historical financial bubbles. The model generates a novel mechanism for volume: because of the interaction between extrapolative beliefs and disposition effects, investors are quick to not only buy assets with positive past returns but also sell them if good returns continue. Using account-level transaction data on the 2014–2015 Chinese stock market bubble, we test and confirm the model’s predictions about trading volume. We quantify the magnitude of the proposed mechanism and show that it can increase trading volume by another 30$\%$.

Source: Review of Financial Studies

DOI: 10.1093/rfs/hhab070

Authors: Jingchi Liao, Cameron Peng, Ning Zhu

Institutions: Shenzhen Stock Exchange, London School of Economics and Political Science, Shanghai Jiao Tong University

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,460

Funder: Economic and Social Research Council