Extrapolative Market Participation

69 Pages Posted: 21 Apr 2021 Last revised: 24 Feb 2024

See all articles by Wanbin Pan

Wanbin Pan

School of Management, University of Science and Technology of China

Zhiwei Su

University of Macau

Huijun Wang

Auburn University

Jianfeng Yu

Tsinghua University - PBC School of Finance

Date Written: March 31, 2021

Abstract

This paper proposes an asset pricing model featuring extrapolative market participation by retail investors, who increase participation following high market returns and high new participation growth (NPG). The extrapolative market participation induces momentum, value effects, and asset bubbles. More important, the model suggests that NPG positively (negatively) predicts momentum (value) strategy returns. Using a composite measure for NPG, we empirically confirm these predictions. Following periods of high (low) NPG, the momentum effect is 1.87% (0.55%) per month, while the value effect is -0.08% (0.68%) per month. A similar yet weaker pattern also holds for the time-series momentum and value effects.

Keywords: Extrapolation, Momentum, Participation, Sentiment

JEL Classification: G12, G40, G41

Suggested Citation

Pan, Wanbin and Su, Zhiwei and Wang, Huijun and Yu, Jianfeng, Extrapolative Market Participation (March 31, 2021). Available at SSRN: https://ssrn.com/abstract=3830569 or http://dx.doi.org/10.2139/ssrn.3830569

Wanbin Pan

School of Management, University of Science and Technology of China ( email )

Hefei, Anhui
China

Zhiwei Su

University of Macau ( email )

Faculty of Business Administration
Macau, 999078
China

Huijun Wang

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

Jianfeng Yu (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China

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