Abstract

https://ssrn.com/abstract=2897378
 


 



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


Ziyang Geng


Shanghai Pudong Development Bank

Xiaomeng Lu


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

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.

Number of Pages in PDF File: 52

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

JEL Classification: G02, G12, F30


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Date posted: January 11, 2017  

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

Contact Information

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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