Differential Origins and Impacts of Extensive and Intensive Flows: Theory and Evidence

Posted: 29 Sep 2022 Last revised: 21 Oct 2022

See all articles by Xindi He

Xindi He

Georgia Institute of Technology - Scheller College of Business

Allen Hu

Yale School of Management

Date Written: March 21, 2022

Abstract

We decompose the trading volume of individual stocks into extensive and intensive flows, where extensive flows are trading volumes of investor entry and exit while intensive flows are position adjustments by continuing holders. To distinguish their differential origins and impacts, we model extensive and intensive flows in a variant of Grossman-Stiglitz. The model features a group of constrained investors, who can hold only one of the two risky assets, and a group of unconstrained arbitrageurs, who can hold both assets. Constrained investors endogenously move between two assets, creating extensive flows in the market. After shocks to the payoffs of both assets, only continuing holders can observe the true signal, while others need to infer the signal from price changes. Since the extensive flows are unobservable, they are not accurately incorporated into signal inference, which leads to the Subjective Flows Equilibrium (SFE). Compared to the benchmark of Rational Expectation Equilibrium, SFE predicts differential effects of extensive and intensive flows on asset returns and volatility. We provide evidence to confirm these predictions using daily transaction records of a large group of individual investors.

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Suggested Citation

He, Xindi and Hu, Allen, Differential Origins and Impacts of Extensive and Intensive Flows: Theory and Evidence (March 21, 2022). Available at SSRN: https://ssrn.com/abstract=4228360

Xindi He (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://https://www.hexindi.com/

Allen Hu

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

HOME PAGE: http://www.anallenhu.com

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