Research On The Asset Price Behavior Of The Chinese Stock Market Based On Overconfidence And Asymmetric Information

Overconfidence is one of the defining psychological traits of irrational investors. It affects their information processing and trading behavior, and thus influence assets'prices in the security market. Therefore, it is important to study assets'price behavior based on human overconfidence and mechanism of information flow within the framework of the theory of financial market microstructure. This paper is based on the theory of financial market microstructure and the classic information model. It is a systematic analysis of how overconfidence drives transactions and how it affects asset price behavior both theoretically and empirically. This analysis consists of five main parts:1. The research is about the driving force of transactions based on asymmetric information and over-confidence. Firstly, it's different from traditional economic researches in that it measures ultra-high-frequency probability of informed trading with the Nyholm model, studies ultra-high-frequency characteristic between transaction activity and asymmetric information in particular, and analyses more thoroughly the reasons for changes of transactions'duration, volume, and informed trading. Those in-depth researches on each transaction clearly show the relations between all variables. Secondly, this paper takes the environment of information structure into consideration, referring to public information. It sets up a state -dependent overconfidence model based on classic information model and the framework of rational expectation. It studies how information structure influences overconfident investors'information processing, hence their trading strategy and the equilibrium prices of assets in the market when there's not noise traders. It studies the intrinsic relations between historical yield and volume of transactions from the perspective of information flow and microstructure, which is a new way to explain the driving force of transactions.2. This paper continues to study overconfidence and price volume relations in China's security market. It sets up a quantitative model to measure the effect of overconfidence upon different industries, stocks and the security market as a whole. Firstly, it looks at the whole market, observes investor behavior and overconfidence effect based on data collected from the market. It empirically tests the time relations between yield and transaction volume in the market. Secondly, it further analyzed the dynamic relations between yield and transaction volume of individual stocks. It treats stocks in different industries as a whole and studies the effect upon it of overconfidence and disposition respectively. This enables us not only to observe the traits of overconfidence effect in a whole cycle of security market in China, but also to study the cross-sectional differences of overconfidence effect in individual industries and stocks, thus to find empirical reasons for such differences.3. Relations between investor overconfidence and volatility in the security market. Measures taken to study overconfidence effect in this paper is different from those traditionally used. It collects data of individual stocks and the market as a whole and 1) observes exchanges of Shanghai and Shenzhen– the two A share markets in China– to study the extent to which overconfidence can be applied to explain the mysterious financial phenomenon of unknown transaction volume. 2) It studies the cross-sectional differences of the relations between over-confidence and volatility based on different industries and stocks, then continue to discuss the interactions between over-confidence and volatility by groups divided according to company size and transaction dynamism. In this way, we can not only understand the interaction between over-confidence and volatility, but also do in-depth research of the differences and similarities in different industries and stocks of the relations between the two, thus explain the mechanism and our experience.。4. Investor overconfidence and market quality. This paper sets up a dynamic index system which includes variables such as market depth and efficiency based on the high frequency market index data. It also discusses deeply the relations between overconfidence and market quality, reveals the dynamic relations between different quality indices such as overconfidence, volatility, liquidity, market depth and efficiency. This is the first comprehensive study of the dynamic relations between over-confidence and market quality in China's security market. It studies in the intrinsic interactions of the two from the perspective of both the market and individual stocks. It broadens domestic scholars'perspective in term of theoretical research in Behavioral Finance based on microstructure. It also builds reliable scientific grounds for governments'policy making.5. Investor overconfidence and cross-arbitrage using momentum strategy in stock trading. 1) The paper is based on the framework of information model. It builds up a theoretical model of sequential trading that can directly measure the probability of overconfidential transactions in the market, using parameters of overconfidence and specific information structure environment. It estimates parameters in a rational way and thus enables the measurement of overconfidence. 2) It builds up investment portfolio and cross-over strategy upon the estimated overconfidence index, studies the relations between overconfidence and the momentum effect in China's market, and for the first time explains the reasons for momentum effect in China through the perspectives of both empirical tests and irrational investors.