Hongqi Liu 刘洪七

Publications

Taming the Bias Zoo with Cameron Peng, Wei A. Xiong, and Wei Xiong

• Journal of Financial Economics, 2022, 143, 716-741

• 2021 CFRC Best Paper Award

• Online Appendix

• Abstract: The success of the behavioral economics literature has led to a new challenge—a large number of behavioral biases offering observationally similar predictions for a targeted anomaly in financial markets. To tame the bias zoo, we propose a new approach of combining subjective survey responses with observational data; this approach has the advantage of being robust to question-specific biases introduced through surveys. We illustrate this approach by administering a nationwide survey of Chinese retail investors to elicit their trading motives. In cross-sectional regressions of respondents’ actual turnover on survey-based measures of trading motives, perceived information advantage and gambling preference dominate other motives, even though they are not the most prevalent biases simply based on survey responses.

Retail Attention, Institutional Attention with Lin Peng and Yi Tang

• Journal of Financial and Quantitative Analysis, 2022, 58, 1005-1038

• Best Paper Awards finalist, 2018 FMA Asia Pacific Conference

• Abstract: We document distinctly different clientele effects in investor attention and return responses to information. Macro news crowds out retail investor attention to firms’ earnings news by 49%. For stocks with high retail ownership, macro news dampens earnings announcement returns by 17% and substantially increases post-announcement drift, especially during high VIX periods. In contrast, macro news increases institutional investor attention to scheduled earnings announcements but not their attention to unscheduled analysts’ forecast revisions. The findings confirm the implications of rational inattention models and highlight the importance of considering clientele effects in understanding the effect of news on attention and asset prices.

Working Paper

Investor Memory and Biased Beliefs: Evidence from the Field with Zhengyang Jiang, Cameron Peng, and Hongjun Yan

• Revise and Resubmit at Quarterly Journal of Economics

• 2023 CFRC Behavioral Finance Best Paper Award

• Abstract: We survey a large representative sample of retail investors in China to elicit their memories of stock market investment and return expectations. We merge the survey data with administrative data of transactions to test a model in which investors selectively recall past experiences similar to the present cue to form beliefs. Our analysis uncovers new facts about investor memory and supports similarity-based recall as a key mechanism of belief formation in financial markets. When the market is going up, it cues investors to recall their past experiences more positively. Recalled experiences explain a sizable fraction of cross-investor variation in beliefs and dominate actual experiences in explanatory power. Recalled experiences also drive out the explanatory power of recent returns for expected future returns, ruling in a memory-based foundation for return extrapolation.

The Funding-Constraint-Based Explanation of the Beta Anomaly: a Natural Experiment from China’s Stock Market with Yi Tang

• Abstract: We use China's recent introduction of margin trading as a natural experiment to test the predictions of the funding-constraint-based interpretation of the beta anomaly about expected returns, liquidity, and book-to-market ratios. We find that the beta anomaly becomes much stronger; high-beta stocks become more liquid and receive higher market value per unit of book equity than low beta stocks after the introduction of margin trading; and the beta anomaly disappears after controlling for the lottery-demand effect. Overall, our results suggest that the beta anomaly is less likely to be driven by investors' funding constraints but by their demand for lottery stocks.