Wealth Redistribution in Bubbles and Crashes

66 Pages Posted: 19 Jun 2019 Last revised: 26 Dec 2019

See all articles by Li An

Li An

Tsinghua University - PBC School of Finance

Jiangze Bian

University of International Business and Economics (UIBE)

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Donghui Shi

Shanghai Stock Exchange

Date Written: November 1, 2018

Abstract

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

Suggested Citation

An, Li and Bian, Jiangze and Lou, Dong and Shi, Donghui, Wealth Redistribution in Bubbles and Crashes (November 1, 2018). Available at SSRN: https://ssrn.com/abstract=3402254 or http://dx.doi.org/10.2139/ssrn.3402254

Li An (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Jiangze Bian

University of International Business and Economics (UIBE) ( email )

10, East Huixin Street, Chaoyang District
Beijing, 100029
China

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Donghui Shi

Shanghai Stock Exchange ( email )

Shanghai 200120
China

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