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

52 Pages Posted: 11 Jan 2017  

Ziyang Geng

Shanghai Pudong Development Bank

Xiaomeng Lu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: October 1, 2015

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.

Keywords: mispricing, attack, speculation, extrapolation, limits-to-arbitrage

JEL Classification: G02, G12, F30

Suggested Citation

Geng, Ziyang and Lu, Xiaomeng, Bubble-Creating Stock Market Attacks: Widespread Evidence from the Chinese Stock Market (October 1, 2015). Available at SSRN: https://ssrn.com/abstract=2897378 or http://dx.doi.org/10.2139/ssrn.2897378

Ziyang Geng

Shanghai Pudong Development Bank ( email )

No.12 Zhongshan Dong Yi Road
Shanghai
China

Xiaomeng Lu (Contact Author)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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