Trading for Status
Harrison G. Hong
Princeton University - Department of Economics; National Bureau of Economic Research (NBER)
Yale University - School of Management
Shanghai Advanced Institute of Finance; China Academy of Financial Research (CAFR)
November 24, 2012
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: 47working papers series
Date posted: November 20, 2011 ; Last revised: November 27, 2012
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