Bubble-Creating Stock Market Attacks: Widespread Evidence from the Chinese Stock Market

Topic:

Bubble-Creating Stock Market Attacks: Widespread Evidence from the Chinese Stock Market

Date:

20/01/2017

Time:

10:30-12:00am

Venue:

Room 502, Daoyuan Building, CUHK (SZ)

Speaker:

Xiaomeng Lu  

Shanghai Advanced Institute of Finance

Detail/

Abstract: 

In existing behavioral finance literature on stock mispricing, rational investors largely play a passive role in tolerating mispricing due to limits to arbitrage. In this paper, we show that rational speculators sometimes proactively and intentionally create mispricing by driving up stock prices away from their fundamental values through synchronized attacks with explosive trading volumes. The inflated stock price is subsequently supported by new rounds of irrational buyers who are subject to extrapolation bias and by existing stockholders who are reluctant to sell due to the disposition effect. This paper develops a simple model to illustrate how bubble-creating attacks can succeed in equilibrium under certain limits-to- arbitrage conditions, and provides consistent empirical evidence in the Chinese stock market using investors’ trading data from a large brokerage company in China.