Wealth Redistribution in Bubbles and Crashes
66 Pages Posted: 19 Jun 2019 Last revised: 26 Dec 2019
Date Written: November 1, 2018
What are the social-economic consequences of financial market bubbles and crashes? Using comprehensive daily administrative data from China, we document a substantial increase in inequality of wealth held in risky assets by Chinese households in the July 2014 to December 2015 bubble-crash episode. Specifically, we show that relative to a buy-and-hold investor, the largest 0.5% households in the equity market gain 254B RMB while the bottom 85% lose 250B in this period, or 30% of either group’s initial equity wealth. This wealth redistribution is at least in part due to heterogeneity in households’ investment skills; in particular, trading activity of the top 0.5% strongly and positively forecasts, whereas that by the bottom 85% negatively predicts, future stock returns. Compared to the two-and-half years prior to June 2014, when the market is relatively calm, the impact of heterogeneity in investment skills on wealth concentration is greatly amplified in the bubble-crash episode.
Keywords: bubbles and crashes, wealth inequality, market participation, social impact
JEL Classification: D14, D31, D91, G11, G51, O16
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