Trading for Status∗

We test the hypothesis that status preference amplifies trading activity in stock markets. This preference leads to demand for local stocks to track neighbors that rises with the stock market and generates trading between status and non-status seekers. We use an empirical design from China, where we measure intensity of status concerns by province based on income and luxury brand internet searches controlling for income. Using large stocks to control for investment sets across provinces, we find higher share turnover and a higher sensitivity of turnover to returns for small relative to big stocks in high-status concern compared to low-status concern provinces. These differences have increased in recent years with a rising middle class in China. Local small stocks in high-status concern provinces also have higher prices. ∗Hong acknowledges support from the National Science Foundation through grant SES-0850404. We are grateful for the comments of Warren Bailey, and seminar participants at New York University, University of Amsterdam, Fudan University, Southwestern University of Finance and Economics, and Hong Kong University of Science and Technology. †Princeton University, NBER, and China Academy of Financial Research (e-mail: [email protected]) ‡Yale University (e-mail: [email protected]) §Shanghai Advanced Institute of Finance and China Academy of Financial Research (e-mail: [email protected])