Analysis Of Conditions For Market Stability In A Heterogeneous Asset

The difference between the auction mechanism and the market maker mechanism is that there is a special liquidity provider in the market, namely market maker. From the action of the market maker, it is known in traditional theory that market maker mechanism basically has two main functions which improve the market liquidity and stabilize the market. Therefore, market maker mechanism is used in new capital market, such as NASDAQ, JASDAQ etc. In our country, the market maker mechanism was introduced in some capital markets, such as the foreign exchange market, our domestic interbank bond market and property market. It is shown that the market maker mechanism is useful for these capital markets.However, some phenomenons are gradually found to prove that the traditional theory about the market maker mechanism has some flaws. These phenomena show that there are some conditions which ensure market maker mechanism to stabilize the market. In order to find these conditions, we construct a heterogeneous asset pricing model. By studying the nature of the model, we find these conditions to explain how to stabilize the market via the market maker mechanism.This paper is divided into five chapters.The first chapter is to introduce the main contents of this paper, which contain the background and significance of the research, the review of current studies in the field of our research, the methods and structure arrangements used in the paper. The innovation and the deficiency in the paper are illuatrated.The second chapter is to introduce a kind of heterogeneity asset pricing model which is built on adaptive rational concept by Gaunersdorfer et al.(2008), namely GHW model. Firstly, introducing the concept of adaptive rationa, we state the work of Brock and Hommes (1997、1998) that constructs a kind of heterogeneity asset pricing model under the auction mechanism (called as BH model). Secondly, following the view of Gaunersdorfer et al.(2008) about the disadvantages of BH model, we present the model which is built on modification for BH model(called as GHW model). We analyze the advantages of the GHW model to explain why we chose this model as the basic model to build our new model in this paper.The third chapter is to review the market maker mechanism. Firstly, the basic concept of the market maker which contains the action is introduced. The right and obligations of market maker are investigated. Secondly, the concept of market maker is used to discuss the characteristic of the market maker mechanism.The fourth chapter is that based on GHW model, we construct a new model which shows the market structure with market maker mechanism (called NGHW model). The related properties of NGHW model are investigated. We will use two methods which are bifurcation theory and time-frequency domain analysis to study the characters of NGHW model, and try to explain the economics meaning of the NGHW model.The fifth chapter contains the state of market maker mechanism in China’s capital market situation. We discuss the reason why China’s government in second-board market is not to use market maker mechanism. The necessity and feasibility that the market maker mechanism is needed in the second-board market in the future are given. Finally, we state some conclusions of the NGHW model to give proposals for the government how to introduce the market maker mechanism.The innovations established in this paper are classified as follows.Firstly, based on the research of Chiarella and He (2003), Gaunersdorfer et al. (2008), we construct a new theory model (NGHW model) which are different from BH model and GHW model.Secondly, numerical analysis of the model that we discussed are obtained by using the time-frequency domain analysis method (i.e. wavelet packet transform and short-time Fourier transform), which is quite different from those presented in the literatures.Thirdly, the conclusions of investigating the NGHW model are useful to perfect market supervision system under the market maker mechanism. Using our country’s existed market supervision system as an example, although the social public opinion supervision has been regarded as an integral part of the supervision system, for a long time, it did not cause the regulators’ attention. NGHW model is mathematically used to prove the anticipation of market investors and it affects the market stability. This shows that our country should strengthen the supervision department of social public opinion and makes the anticipation of market investor be to correctly guided to ensure market stability.Finally, the obtained conclusion of NGHW model will be conducive to the legal Settings about market maker mechanism. For example, many scholars claim to use the foreign law to solve the problem that the legal of our country is not perfect about market maker mechanism. what two-way quotation price of market maker cannot exceed 5% is one of the many legal. In fact the differences between domestic and foreign stock market require that the regulations set 5% can not be copied. The feasibility is proved by NGHW model. At the same time, according to this conclusion, the setting 5% should be fixed in the line with domestic securities market environment.Although this paper has multiple innovative aspects, it is undeniable that our results still possess deficiencies which are stated in the following four aspects.A:Since the. model structure is established in various hypothetical basis, it is impossible to find in the realistic society with model consistent capital market. Therefore, it is unable to find the conclusion correctness of inspection. Namely, the study conclusion is not the verification.B:There does not exist corresponding empirical research for certain questions which are from the research conclusion of NGHW model. For example, the NGHW model have shown that market maker and market invstors will commonly effect the market. However, the degree from each one is not specifically established. This problem needs the empirical mode to be proved. Also, the lack of related data determines that we are unable to solve this problem for empirical research.C:For the model itself, it needs to be fully investigated. In NGHW system, the market structure assumes that the market exists two assets which are risk-free assets and risky assets. Although such assumption is very common in the current financial theory, the difference that exists in reality cannot be ignored. Considering this difference, the author thinks that if the number of risk assets can be extended to number n, the corresponding model will correctly describe the realistic society. This is the direction that we should study the NGHW model in our future work.D:Our study is based on some existing research results. The author had been scarcely engaged in the related concrete work to deal with the NGHW model. Therefore, the depth of the opinion in this paper may be insufficient.