Working papers

1. "Price and Volume Dynamics in Bubbles," with Jingchi Liao, 2017 (JOB MARKET PAPER)

    Abstract: We propose a model of bubbles based on two ingredients: extrapolation and the disposition effect. We show that the model generates the sharp rise in both prices and volume observed in most bubble episodes, and then test the model’s predictions using novel data on the 2014-15 Chinese stock market bubble. Consistent with the model, stocks traded by extrapolative investors exhibit larger price increases during the bubble, while those traded by investors with disposition effects go up much less. Moreover, the increase in volume during the bubble is driven primarily by the subset of investors who are both more extrapolative and more prone to the disposition effect: these investors are quick to buy a stock with good past performance, but also quick to sell it if its price continues to rise.

    Abstract: I study how investors trade under the law of small numbers, the belief that even a small sample represents the characteristics of the underlying population. These investors expect short-term trends to reverse but long-term trends to continue. Using a simple model, I show that the law of small numbers can explain several well-documented trading phenomena: chasing long-term trends, bucking short-term trends, the disposition effect, and the V-shaped selling propensity. Moreover, I derive and successfully test the model's new predictions, and in doing so, I (1) provide evidence for heterogeneous investor horizons, (2) highlight how investors' extrapolation horizon and holding period can explain variation in their disposition effect, and (3) show that the V-shaped selling propensity is an aggregate phenomenon driven by separate groups of investors.


Work in Progress

3. "Trading with Style," with Jun Wu

4. "How do Investors Extrapolate? Evidence from Surveys," with Adriana Robertson

5. "Leverage and Crashes," with Lawrence Jin and Amy Xiong