Study On Idiosyncratic Risk Of Stock Price Volatility And Its Investor Behavior Effects

The functions of stock market work relying on the market signals from the stock price changes, to guide and regulate the financial, economic and social resources allocation being also need of these information. With the continuous development of economy financial, the risks of financial asset price volatility have absorbed widespread concerns and research interests for causing economy fluctuations. On one hand, being driven by the actions and policy changes of the governments, so Chinese stock markets are facing these issues such that being short in system supplies, institutional arrangement and full of immature market investors. All that led the market price to frequent and large fluctuations in Chinese stock markets; On the other hand, with the capital markets and financial environment changes, the financial markets continuously demonstrate the fact that the risk of stock price volatility not only constrained by market risk, but also determined by idiosyncratic risks which could affect the cross-section return of stock assets and thus would influence the overall volatility of stock prices. This paper had researched the reasons for risk of stock price volatility from taking a perspective of idiosyncratic risk, and had analyzed the static and dynamic changes of idiosyncratic risk by using the determinants of investor behavior effects and information uncertainty. In the research, the paper had a detailed explanation for idiosyncratic risk and obtained the characteristic law of idiosyncratic risk after dissertation. The specific contents of the paper include:Firstly, the paper had a literature review for domestic and foreign researches in the fields of stock price volatility, idiosyncratic risk and investor behavior theory related. On the basis of literature surveys, the paper put forward its research thoughts, research methods, writing structure and overall arrangement for full paper.Secondly, the paper described the principle of stock pricing, stock price volatility and influences taken from idiosyncratic risk. Basing on CAPM model, the paper had made a model analysis of stock return on condition of incomplete markets. Under the conditions of idiosyncratic risk, the paper further had taken theoretical analysis of investor behavior in related to stock price deviation and stock price bubble. In the studies of the paper, the theoretical study basis of investor behavior was established upon the impact on investor perspective, psychology and behavior initialed from market information.Thirdly, assuming the dynamic and mixed rational investment attitude, the paper gave a detailed discussion on the relationships between investor behavior and stock price volatility changes. Under the premise of theoretical analysis of idiosyncratic risk and investor behavior, the paper set forth the empirical analysis methods used in this paper. Those include:(1) Factor decomposition analysis of stock price volatility effects; Investor behavior effects model of idiosyncratic risk. (2) Decomposing of stock price volatility and estimating of various volatility components; Calculating of empirical proxy for idiosyncratic risk. (3) The calculating method of stock price volatility components within an industry. (4) Setting up three-factor pricing model and processing approach of estimating time-varyingβcoefficient.Fourthly, referring and improving the method of CLMX (2001), the paper decomposed stock portfolio price volatility components and acquired data for those time series variables. Through statistical description and comparative analysis, the paper found that idiosyncratic risk is the biggest risk component in stock price volatility variables, idiosyncratic risk is the main risk source of stock price fluctuations (in particular, irrational and abnormal fluctuations). The paper described the risk characteristics of market volatility and idiosyncratic risk with using the time series models; and empirically analyzed the dynamic changes and volatility effects of idiosyncratic risk with GARCH models. The results of empirical tests and analysis showed that idiosyncratic risk is being affected by stock market speculating trades, and there is a real internal relationship between them.Fifthly, this paper applied the method of factor decomposition to analyze stock price volatility effects, to decompose monetary policy effects, cluster effect of stock price volatility, investor behavior effects and random effects from the information of stock price volatilities. Based on the results, the paper had given a more reasonable explanation for irrational features of price volatility in Chinese stock market. In use of SVAR model, the paper empirically simulated the equilibrium and interactive relationship between market volatility and investor behavior effects. At the same time, on the basis of quantitative relationship between idiosyncratic risk and investor behavior effects, the paper gave an empirical analysis of short-term interaction and long-term equilibrium relationships between the two types of variables by using error correction model (VEC). On researching investor behavior effects model of idiosyncratic risk, the paper furthered Dennis and Strickland (2004)'s study. With employing Panel data models, a multi-angle of difference analysis was executed on investor behavior effects belong to idiosyncratic risk and systematic risk in the stock price volatility.Finally, at the end of theoretical and empirical analysis, the paper summarized the conclusions for research results, and gave some suggestions for the developments of financial theory and practices of developing Chinese capital markets. The research conclusions and suggestions were aimed at providing a positive reference for improvement in studies of stock price volatilities; bettering the investment environments of Chinese capital markets; carrying out necessary institutional innovations; and achievement for maturity and sustainable development of Chinese capital markets.