Research

Working Paper

Reference Point for Volatility and Disposition Effect

Abstract

I exploit the brokerage data set of individual investors to identify the effect of volatility on trading volume. Both parametric and non-parametric estimates consistently show the existence of volatility threshold effect, i.e. individual investors tend to trade more when the volatility exceeds certain threshold. Motivated by this empirical result, I discuss a portfolio choice model in which I introduce the volatility reference point in addition to the conventional return reference point. This idea is new to the literature. Two possible setups of that model are discussed and simulated to capture the behaviors of mental accounting traders and reinvestment traders. The simulation results show that the disposition effect is generally better predicted in my model with volatility reference point. Finally, the implication of my model is empirically tested, and the fact is identified that investors with low financial sophistication are more susceptible to volatility threshold effect.

(The paper may be available upon request)

Undergraduate Thesis

Migration of Retail Investors during Underpriced IPOs: Evidence from the Chinese Stock Market

Abstract

This study further develops attention-grabbing theory by classifying attention-grabbing sources into common events and isolated events. Then it focuses on underpriced IPOs, a specific kind of common event. To explore their effects on retail investors’ limited attention, I propose the Retail Investors Migration (RIM) model with three mechanisms, i.e. (i) migration of attention (shifting limited attention to new stocks); (ii) migration of herds (following others blindly to trade new stocks); and (iii) reduction in positive feedback. The RIM model has a counterintuitive prediction that market volatility would be lower, not higher, during “Online Issuance Day” and “First Trading Day,” which are the two major milestones in an IPO underpricing event. This surprising finding is then empirically verified by data from the Chinese stock market where retail investors are most concentrated. It is also shown that recurring migration occurs after underpriced new stocks have been traded for several days. Besides, background information and key statistics about the Chinese primary market are presented in detail.

(The paper may be available upon request)