Wealth Redistribution in Bubbles and Crashes

Abstract

What are the social-economic consequences of financial market bubbles and crashes? Using novel comprehensive administrative data from China, we document a substantial increase in inequality of wealth held in equity by Chinese households in the 2014-15 bubble-crash episode: the largest 0.5% households in the equity market gain, while the bottom 85% lose, 250B RMB through active trading in this period, or 30% of either group’s initial equity wealth. In comparison, the return differential between the top and bottom household groups in 2012-14, a period of a relatively calm market, is on the order of 1 to 3%. We examine several possible explanations for these findings and discuss their broader implications.

Keywords: bubbles and crashes, wealth inequality, market participation, social impact

JEL Classification: D14, D31, D91, G11, G51, O16