Reference Price Updating, Adaptation, and Trading Volume

19 Pages Posted: 29 Oct 2014 Last revised: 28 Nov 2014

See all articles by Leilei Shi

Leilei Shi

Haitong Securities Co. Ltd.----Beijing Fuwaidajie; Haitong Securities Co. Ltd.----Beijing Fuwaidajie; International Institute of Finance, School of Management, University of Science and Technology of China (USTC)

Yiwen Wang

Beihang University (BUAA)

Date Written: November 27, 2014

Abstract

Trading an individual stock in mental accounting, crowd’s traders usually buy and sell in terms of narrowly defined gain and loss relative to a reference price about a behavioral value rather than a fundamental value on a trading day. A reference price is the price where trading volume or trading weight is the maximal across different prices on a trading day. The trading action generates a limited number of patterns about cumulative trading volume distribution over a price range because of mental accounting, loss aversion, trading weight, and coherence or agreement in trading. However, a reference price is updated to realize a significant gain and loss from time to time after a large imbalance on a trading day. We study how a past gain or loss elicits people to trade more or less frequently in a time series. We examine their adaptive behaviors to gain or loss in trading by analyzing correlation between realized gain or loss and change in total trading volume in any two consecutive trading days. Crowd’s traders update a reference price about the value of an individual stock via learning and generate a significant realized gain or loss. They adapt to the gain and loss realized by the updating via trading volume increase or decrease significantly in any two consecutive trading days. Our study makes distinction on two types of a reference price in multiple reference prices in trading: a reference price about a value in a time interval and a reference price about realized gain or loss in a time series. It also captures the coexistence of apparently contrary attitudes to risk from crowd’s traders in stock market: risk aversion from sellers and risk seeking from buyers in the gains of high probability; and risk seeking from sellers and risk aversion from buyers for the losses of high probability.

Keywords: crowd’s traders, reference prices, trading volume, reference price updating, adaptation, risk attitude

JEL Classification: G12, G02, D83

Suggested Citation

Shi, Leilei and Shi, Leilei and Wang, Yiwen, Reference Price Updating, Adaptation, and Trading Volume (November 27, 2014). Available at SSRN: https://ssrn.com/abstract=2515352 or http://dx.doi.org/10.2139/ssrn.2515352

Leilei Shi (Contact Author)

Haitong Securities Co. Ltd.----Beijing Fuwaidajie ( email )

Ground FL., Wantong Financial Mansion
#2 Fuwaidajie, Xicheng District
Beijing, Beijing 100037
China
+8618611270598 (Phone)

HOME PAGE: http://shileilei8.bokee.com

Haitong Securities Co. Ltd.----Beijing Fuwaidajie ( email )

Ground FL., Wantong Financial Mansion
#2 Fuwaidajie, Xicheng District
Beijing, 100037
China
0086+18611270598 (Phone)

HOME PAGE: http://https://www.htsec.com/ChannelHome/4793976/index.shtml

International Institute of Finance, School of Management, University of Science and Technology of China (USTC) ( email )

96, Jinzhai Road
Hefei, Anhui 230026
China
(0086)18611270598,13671328061 (Phone)

Yiwen Wang

Beihang University (BUAA)

37 Xue Yuan Road
Beijing 100083
China

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