Research
Working Papers
with Yucheng Liang
This study explores how the historical price path of a stock shapes investors’ perceptions of risk. In a series of experiments, we present participants with real and fabricated stock price charts and elicit their risk perceptions. We document that a parsimonious set of three conceptually independent features, i.e., recency, clustering, and sign, can explain large proportions of the variation in risk perceptions. We find that the effects of these three features are partially mediated by their impact on perceived volatility, which is not fully explained by Bayesian inference. In addition, a significant portion of the features’ effects on risk perceptions occurs independently of perceived volatility. Using U.S. real stock and mutual fund data, we show that these three features help explain cross-sectional variations in returns, trading volume, and future volatility of individual stocks, and predict mutual fund negative flows.
with Ning Zhu
Investors perceive cash in savings accounts (“cold cash”) differently from cash recycled in brokerage accounts (“hot cash”). We propose a novel “temperature” framework for dynamic and repeated mental account refreshing process. We find individual investors buy stocks more cautiously with colder cash. Exploiting a quasi-natural experiment of the Chinese IPO-lottery reform, we show the effect is causal. An online experiment indicates the differential loss aversion is a potential channel. Building on observational and experimental findings, we propose a model featuring preferences with temperature-dependent sensitivity to future gains-and-losses, which generates our empirical patterns and provides a cash-temperature perspective for other puzzles.
with Allen Hu
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.
This paper studies how investors evaluate themselves and its implications. In my model, investors form subjective beliefs about both the stock currently held in portfolio and their trading talent and update their beliefs through learning with fading memory. I calibrate the memory decay parameters to account-level trading records and show that beliefs updating for talent is about 7 times more sensitive to return signals than that for the stock in portfolio. Consequently, the model predicts that stock replacing typically happens after a good performance of the existing stock, providing a dual learning perspective on the disposition effect. This framework also accounts for the widely documented performance-contingent trading intensity and investor attrition, which cannot be reconciled with the decreasing-gain property of the standard Bayesian learning.