52 Pages Posted: 11 Jan 2017
Date Written: October 1, 2015
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: 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