Non-fungible Cash in the Stock Market

Investors view cash in their savings accounts differently from cash recycling in their stock brokerage accounts. I propose a novel "temperature" framework for financial resources, in which the former is labeled "cold cash" and the latter "hot cash." I find individual investors tend to buy stocks more cautiously when using cold cash than when using hot cash. Exploiting the quasi-natural experiment of the 2016 Chinese IPO lottery reform, I show the effect of cash temperature on investors' cautiousness in stock selection is causal. To explore the mechanism, I propose a portfolio choice model featuring preferences with temperature-dependent sensitivity to future gains and losses. The model generates the empirical patterns documented in this paper and provides a cash-temperature interpretation for understanding other puzzles in the literature.