Speculative Bubble In The Capital Markets, Herd Behavior And Investor Psychology

Recently, speculative financial behavior has become a major factor of financial crisis in developing countries. Financial liberalization leads to assets price bubbles. Then speculative bubbles lead to bank crisis. And in the end, the economic recession happens. In 1990's the outbreak of speculative bubbles not only did great harm to the economy in Japan, Mexico and the Southeast Asia but also influenced other countries and regions.Therefore, doing some researches in speculative bubbles and investors' psychology and their behavior is meaningful. It can not only help evaluating the nature of financial crisis but also help discovering the financial fragility in advance. So the regulator can take some preventive measures in time. With China's entry into the World Trade Organization and open-door policy of reform, the systematic research on that aspect is useful to prevent excessive speculation, financial risk and financial crisis. In addition, it can do great help to the healthy development of the stock market and the economy, both in theoretical problems and practical ones.Rooted in Chinese reality, with speculative bubbles as the theme, the article systematically analyses its beginning, development and outbreak phases as well as its influence on the economy. It develops its analyses from the angle of investors' psychology and their behavior. On the other hand, it analyses the existence of the speculative bubbles and herding behavior in China's stock market which are closely related. Furthermore, it put forward some measures to control the speculative bubbles, to enhance the market efficiency and to benefit the capital markets development.The main contents and contributions are as follows:Firstly, it defines the concepts "speculative bubbles" and "herding behavior"; it makes systematic comments on research papers about the speculative bubbles and investors' psychology and behavior.Secondly, based on the maximization of the personal utility, it advances thebasic pricing equation and the methods to analyze the general equilibrium of speculative bubbles. By relaxing the premise, it develops the research to the limited logical condition.Thirdly, it develops the noise trading model (De Long et al., 1990a; Binswanger, 1999) to the condition in which the basic factors can be changed. Since considering the transaction tax in the securities market, it makes the noise trading model more realistic to describe the process of speculative bubbles.Fourthly, under the structure of general equilibrium, it analyzes the speculative bubbles' impact on the economy with Overlapping Generation Model which considers the technology advances and random real capital gain ratio. It not only introduces the achievements of foreign economists (Tirole, 1985, Weil, 1987; Blanchard and Fisher, 1989); but also does the creative research on the movable economic efficiency during the transitional period.Fifthly, with the financial econometrics, especially the duration analyses and LSV testing technology, it systematically and empirically analyses the speculative bubbles and herding behavior in China's securities market, which makes it different from other qualitative and quantitative home researches.Lastly, according to the conclusions, it puts forward some proposals to control and eliminate the home markets bubbles, to enhance the market efficiency. Those suggestions are instrumental to widen financial theories as well as to instruct the financial practice.