Trading for Status

Abstract:     
We show that Keeping-up-with-the-Jones preferences can explain several puzzling retail investor behaviors, including excessive trading and trend chasing of small local stocks. Status concerns lead households to demand these stocks to track neighbors. This demand increases with the market and generates trading volume. We test this idea using the rise of a Chinese middle class from 1998-2009. We measure status concerns by province based on income, luxury brand internet searches and male-female sex ratio imbalance. We find small stocks better track private firm performance than large ones. There is indeed also greater turnover of smaller stocks in higher status-concerns provinces.

Number of Pages in PDF File: 47

working papers series