Extrapolative bubbles and trading volume

Jingchi Liao, Cameron Peng and Ning Zhu

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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%.

JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2022-04-01
New Economics Papers: this item is included in nep-cwa, nep-isf, nep-mst and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published in Review of Financial Studies, 1, April, 2022, 35(4), pp. 1682 - 1722. ISSN: 0893-9454

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:110514

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