Working Paper: CEPR ID: DP15029
Authors: Dong Lou
Abstract: Using comprehensive administrative data from China, we document a substantial increase in inequality of wealth held in risky assets by Chinese households in the 2014-15 bubble-crash episode: the largest 0.5% households in the equity market gain, while the bottom 85% lose, 250B RMB through active trading in this period, or 30% of either group’s initial equity wealth. In comparison, the return differential between the top and bottom groups in 2012-14, a period of a relatively calm market, is an order of magnitude smaller. We examine a number of possible explanations for these findings and discuss their implications.
Keywords: bubbles; crashes; social impact; wealth inequality; market participation
JEL Codes: D14; D31; D91; G11; G51; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wealth redistribution during the bubble-crash episode (H23) | substantial increase in inequality of wealth (D31) |
| differences in investment skills and capital constraints among households (D14) | wealth redistribution (H23) |
| active trading behaviors of top households (D14) | wealth transfer to ultra-wealthy (D64) |
| top households' better market timing abilities (G59) | wealth transfer to ultra-wealthy (D64) |
| bottom households' trading negatively forecasts future stock returns (G17) | wealth loss for bottom 85% (D31) |
| top households' trading positively predicts returns (G59) | wealth gain for top 0.5% (D33) |
| increased market volatility and trading volume during bubble periods (E32) | exacerbated wealth redistribution (D31) |