Extrapolative bubbles and trading volume

Liao, Jingchi, Peng, Cameron ORCID: 0009-0008-1297-8686 and Zhu, Ning (2021) Extrapolative bubbles and trading volume. Financial Markets Group Discussion Papers (828). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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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: due to the interaction between extrapolative beliefs and disposition effects, investors are quick to buy assets with positive past returns, but also quick to sell them if the 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 percent.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2021 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited:	23 May 2023 10:27
Last Modified:	01 Oct 2024 04:04
URI:	http://eprints.lse.ac.uk/id/eprint/118887

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