Theoretical Research On Stock Pricing Based On Evolutionary Paradigm

Stock pricing theory is one of the focuses that modern economics and finance are concerned about. The dissertation tries to break through the traditional methodology and theoretical program. It also tries to make new exploration to the stock pricing theory according to the evolutionary paradigm. The purposes of the dissertation are as follows: First, make a more practical explanation about the moving process of the stock price. Secondly, widen the appliance scope of evolutionary economics and combine the evolutionary economics and the stock pricing issue. Thirdly, put forward a new investment strategy in the stock market. The dissertation adopts the fundamental methodology and assumptions of evolutionary economics. The main approaches includes: (1) Systems thinking approach; (2) Ontogenetic and phylogenetic approach.; (3) Induction, deduction and abstraction.; (4) Static analysis and dynamic analysis; (5) Comparison method; (6) Empirical test.The dissertation analyzes the stock pricing issue using evolutionary paradigm. The content can be generalized into three parts: Part 1 is the methodology and theoretical system of evolutionary economics, including chapter 1 and 2. This part aims to lay the foundation for the following research and provide theoretical research method and program. Chapter 1 discusses evolutionary economics methodology and theoretical frames. Chapter 2 evaluates and compares all kinds of stock pricing theory and points out their weak points. The author compares the pricing theories from three aspects: the theoretical types of pricing knowledge, the regularity of the stock price movement and some material issues. The author thinks the analysis frames of evolutionary structure and process can be applied in the research of the stock market. The second part is the hard core of the dissertation, including chapter 3 and 4. The author reconsiders the stock market from the point of evolutionary paradigm. Chapter 3 describes the basic trading factors. The variables that influence the stock pricing include: the stock trading, the traders, the trading fund, the trading objects, the stock market institutions, politics and culture, the trading environment and ecosystem evolution. Chapter 4 puts forward the evolutionary circle hypothesis to interpret regularity of the price index fluctuations and evolutionary pricing hypothesis to explain the individual stocks pricing issues. The third part, that is chapter 5, is the empirical test. We makes a comparison between the fundamental factors that influence the stock prices in American, British, Japanese and Chinese stock markets and experientially justify our evolutionary circle theory.The main achievements are presented as follows:Firstly, the dissertation reviews the methodology of evolutionary economics. Darwinism offers philosophical foundation and analysis framing. Modern evolutionary economics thinks much of the Critical Realism. The fundamental assumptions of evolutionary economics include at least: complicated behavioral individual, emphasis on mind, satisfaction, uncertainty, variety, and emphasis on history. The characteristic methods include abduction approach, ontogenetic and phylogenetic approach, geo-historical relativity analysis method, comparative method, and dynamic analysis method.Secondly, the dissertation summarizes the evolutionary analysis framings in a general way, which are evolutionary structure analysis framing and process framing. Evolutionary structure analysis framing can be described like this: economical system is complicated with many hierarchies, which includes individual and population. They form different hierarchies. Ontogenesis and phylogenesis exist in different hierarchies. At the same time, the variables that influence system evolution are also divided into different hierarchies. Considering the effect of thinking and knowledge, we can divide the economic system into surface structure and deep structure. Evolutionary structure process framing can be summarized to be three patterns: Darwinism heredity-variation-selection analysis framing, micro evolutionary framing and macro evolutionary framing. The basic ideas of the patterns are consentaneous.Thirdly, we put forward the evolutionary cycle hypothesis. The logic of the hypothesis is: the fundamental variables, such as the traders, the trading objects, the trading fund, the stock market institutions and the trading environment, have an influence on the mass trading behavior, which directly determines the stock price. We divide the traders into two kinds: individual investors and institutional investors. The behavior of the individual investor is determined on the trading strategy and trading skills. As to the institutional investor, its behavior is determined on the trading strategy and trading routine. Because the trading strategy and trading routine have great influence on the stock price index, we can neglect the individual's function on the index variance. From the point of trading content, there are trading routines on how to select stocks and how to select proper trading time. We consider the trading routine as the hereditary gene in the stock market. As to the trading routines on how to choose stocks, we put forward an assumption: when a fashionable pattern of choosing stocks appears, the traders will purchase stocks according to this pattern. The fashionable pattern is not stable. The individual selection and Darwinian selection play an important role in the emergence, diffusion and stability of the fashionable pattern. Owing to the uncertainty and unpredictability of the innovation, we can't forecast the exact changing time of the fashionable pattern. The three formulae are the core of our theory.SI' = F[TROB(fm)] ( i )TROB(fm) = f[lx(sz₁, ,sz₂)] (ii)SI = F(TR, TO, TF,TI,TE) (iii)The three formulae reflect the evolutionary process of four hierarchies. Formula (i) reflects the hierarchy of the price movement and that of the traders' behavior. Formula (ii) reflects the hierarchy of the change of mass idea and that of the traders' behavior. Formula (iii) reflects the hierarchy of the fundamental factors. The real price movement and the change of mass idea are affected and strengthened mutually. They are connected by the traders' behavior, which implies the changes of fundamental factors. The changes of fundamental factors lead to the emergence and diffusion of the fashionable pattern. The fashionable pattern causes the change of trading behavior through trading routines. The change of trading behavior leads to the change of the whole price, which acts on the hierarchy of the fundamental factors. The four evolutionary process circles repeatedly, resulting in the appearance of trend of the price movement. Its core is the function of trading routines.We describe three phases of the rising trend: (1) the phase of interactive influence between the fashionable pattern and the stock price change; (2) the phase of interactive influence between the inner and outer fundamental factors; (3) the phase of interactive influence of the speculation of different hierarchies. In the three phases of the rising trend, the stock price, the traders' behavior, the traders' idea and fundamental factors influence each other repeatedly. In this process, the factors strengthen and support each other continuously. So the rising trend is persistent. Price movement is not random walk. The dissertation also interprets three phases of the falling trend: (1) the phase of interactive influence between the absence of the fashionable pattern and the stock price change; (2) the phase of interactive influence between the inner and outer fundamental factors; (3) the phase of irrational interactive influence of different hierarchies. On macro hierarchy, the moving trend of the stock price is of persistence. In the long term, the rising and falling trends appear in turn. The price change presents itself to be a circular movement.Fourthly, the author put forward the evolutionary pricing hypothesis. The three formulae are the core of our theory.P' = F[TROB(fm)] ( i )TROB(fm) = f[lx(sz₁ ,sz₂ ),g] (ii)P = F(TR,g,TF,TI,TE) (iii)The three formulae reflect the evolutionary process of five hierarchies. Formula (i) reflects the hierarchy of the individual stocks price movement and that of the traders' behavior. Formula (ii) reflects the hierarchy of the change of mass idea, the hierarchy of the individual stocks character and that of the traders' behavior. Formula (iii) reflects the hierarchy of the fundamental factors. The changes of fundamental factors lead to the emergence and diffusion of the fashionable pattern. The fashionable pattern causes the change of trading behavior through trading routines and combination between the pattern and individual stocks characters. The change of trading behavior leads to the change of the price, which acts on the hierarchy of the fundamental factors. Its core is the combination between the fashionable pattern and individual stocks characters which determine investor how to trade the individual stocks.The simplified formula of the evolutionary pricing hypothesis is:r = g' + lx'The formula shows that the expected rate of return equals to summation of the changing rate of corporation management and that of fashionable pattern. The dissertation lists nine combinations between fashionable patterns and stock characters. It also interprets the point that the changing prices indicate the unifications of the property rights nature and fictitious capital nature. It also indicates the unification of the subjectivity and objectivity.Fifthly, the dissertation brings forward the evolutionary investing strategies. It reflects the diversity of investors and strategies. The evolutionary investing strategies include: trend investing strategy, circle investing strategy, fashionable pattern strategy, long-term value investing strategy, negative index investing strategy, compositive investing strategy and price relations effect investing strategy.Lastly, the dissertation makes an international comparison between the fundamental factors that influence the stock prices. It also makes some domestic empirical research. In the past ten years, the price movements of China stock market presents obvious rising trend and falling trend. The average time of the trends is 8 months. And the average surge rate comes to 46.13%. There are obvious fashionable patterns to choose stocks in every rising trend. The material characters of these patterns are quite different. But we can not find the obvious pattern in the falling trend.On the whole, there are two innovations in the dissertation. Firstly, we apply the evolutionary paradigm to investigate the stock market. This is a theoretical intercross and a brand-new visual angle. Secondly, the dissertation brings forward the theoretical hypothesis of evolutionary circle and evolutionary pricing. It is not only the integration of different stock pricing theories, but a new explanation as well.The significance of the research involves theoretical and practical aspects. From the theoretical aspect, there are not so many references which domestic scholars write about evolutionary finance. The author tries to supply the gap. From the practical aspect, our research helps to change the traders' thinking, guide the practical trading and provide more realistic suggestion for the government.