Extrapolative bubbles and trading volume

We propose an extrapolative model of bubbles to explain the sharp rise in prices and volume observed in historical financial bubbles. The model generates a novel mechanism for volume: due to the interaction between extrapolative beliefs and disposition effects, investors are quick to buy assets with positive past returns, but also quick to sell them if the good returns continue. Using account-level transaction data on the 2014-2015 Chinese stock market bubble, we test and confirm the model's predictions about trading volume. We quantify the magnitude of the proposed mechanism and show that it can increase trading volume by another 30 percent.