Extrapolative Bubbles and Trading Volume

Jingchi Liao, Cameron Peng and Ning Zhu

The Review of Financial Studies, 2022, vol. 35, issue 4, 1682-1722

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 G41 G50 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (11)

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