Extrapolative Market Participation

69 Pages Posted: 21 Apr 2021 Last revised: 28 Jun 2022

See all articles by Wanbin Pan

Wanbin Pan

School of Management, University of Science and Technology of China

Zhiwei Su

Tsinghua University - PBC School of Finance, Students

Huijun Wang

Auburn University

Jianfeng Yu

Tsinghua University - PBC School of Finance

Date Written: March 31, 2021

Abstract

This paper proposes a simple dynamic asset pricing model featuring extrapolative market participation by retail investors, that is, increased market participation following high returns in the stock market and high new participation growth (NPG). The model implies that extrapolative market participation induces asset bubbles and large trading volume and produces momentum and value effects simultaneously. More important, the model also implies that NPG positively predicts momentum strategy returns and negatively predicts value strategy returns. Using a composite measure for NPG, we find empirical support for these predictions. The momentum effect is 1.96% per month following high NPG and only 0.51% following low NPG, whereas the value effect is -0.10% per month following high NPG and 0.68% following low NPG. A similar, albeit weaker, pattern also holds for the time-series momentum and value effect.

Keywords: Extrapolation, Factor, Momentum, Participation

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

Tsinghua University - PBC School of Finance, Students ( email )

No. 43, Chengfu Road
Haidian District
Beijing, 100083
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, Chengdu Road
Haidian District
Beijing 100083
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
289
Abstract Views
1,430
rank
147,116
PlumX Metrics