Research Of Noise Trade In China Stock Market

Standard finance theory with represent of the Capital Asset Pricing Model and Efficient Market Hypothesis has been faced with challenges both on theoretical and empirical evidence since the 80's of 20 century. With the research of individual behavioral bias of perceive psychology being introduced in finance economics and the development of information economics, behavioral finance school had been developing and expanding constantly. In contrast to standard finance theory, behavioral finance has been founded on two hypotheses of bounded rationality and bounded arbitrage. Behavioral finance constructed a series of descriptive models which can accurately reflect the real decision-making action of investors, the status of markets circulation and how the prices in securities markets have been determined. As a result, behavioral finance has been provided with more strong power to explain the abnormal phenomena in securities markets. The development of behavioral finance follows two paths in principle, one is direct application of behavioral psychology in the financial market, and the other is research of irrational behavior's influencing the whole market behavior, in which the most primary work is Noise Trade Theory.As a capital market with burgeon and shunt characteristics, stock market in China has typically inefficient and irrational characteristics, and a great deal of information which are irrelevant to company fundamental dominate the market. Through a mass of empirical analyses, many researchers have proved the traits such as "representation bias", "herding effect", "buy high-sell low" can be founded in the investors in China's stock market. Except the bias in investors' behavior, the behavior of listed companies, intermediary institutions and even government have irrational bias in deferent extent all together. The behavior of those micro-subjects will produce important influence to investors' behavior result. All the phenomena indicate that there are inundant noise which are irrelevant to fundamental in the stock market of China. The results of noise trade's dominating market are distortion of stock price forming mechanism, the excess volatility of asset price, the inefficient market, the expansion of bubbles and the accumulation of risks in stock market.Based on the purpose of seeking contradiction springhead of stock market's development, understanding profoundly the function orientation and circulating mechanism of stock market, keeping away financial risks and crises, and driving the market to develop and perfect, the thesis is a formal investigation on the noise trading in stock market of China. We review the related finance literature and then analyze the exhibition, the forming mechanism, the effects and the rectificatory measures of noise trading. Except the introduction, the paper can be divided into 7 chapters.Chapter 1 advances the theory basic of noise trade research. In this chapter, we review the relevant theory of Marxism and behavioral finance first, and then give an analysis frame of stock market's noise trading. We define the signification of noise, noise trade, noise trader, and noise trader risk in the Noise Trade Theory one by one. We analyses the twoness of noise trading as well as the accrual and exist mechanism of noise trader. Afterward, as the jumping-off point of our research, we classify scientifically and discuss amply the causation of noise trade.Chapter 2 analyses the special exhibition of noise trade in stock market of China. Starting with the situation of stock market, we collect the idiographic data to explain the active degree of noise trade from the particular types and the statistic characters. We use the Behavior Asset Pricing Model to test the active degree of noise trading in China's stock market. We also discuss the actuality of noise trader in the aspect of their special composing and survival status, with which we show the necessary of research on noise trade.Chapter 3 analyses the inside mechanism of noise trade formation in stock market of China, that is behavioral bias of market participant subjects. The bounded rationality of participators leads to their cognitive and behavioral bias such as heuristic bias and frame dependence bias, and this is the most direct reason causing noise trade. Considering the stock market of our country, those behavioral biases represent concretely as herding behaviors, inside trade, market manipulation, excess speculation and short-term behavior of investors; excess financing, merger & acquisition, related transactions, information disclosure and dividend distribution of listed companies; besides, the bias of intermediary institutions and government is also the important source of noise trade.Chapter 4 discusses further the outside mechanism of noise trade formation in stock market of China, which is the restriction of market system. System is the restrict conditions of criterion investors' behavior in the financial market, which will influence the investors' cognition and behavior affirmatively. In this chapter, we analyze system arrangements increase and deepen the cognitive and behavioral bias of investors by affecting the mode of information array and the background of information presentation, and then lead to the occurrence of institution noise. During the course of shunt, the main system restricts in China's stock market include the system of market segmentation, Split Share Structure, the lack of sell short, information disclosure, imperfect delisting and market opening.Chapter 5 and chapter 6 research the negative influences of noise trading in stock market. Because the influence of noise trade embodies on the stock price firstly, chapter 5 analyze the noise trade's effect of stock price mechanism. We analyze the forming mechanism and the excess volatility of stock prices on the base of noise trade theoretically, and then use econometrics method and affair analysis method to test the phenomena of IPO and closed-fund underpricing as well as the excess volatility existing in China's stock market.Chapter 6 mainly discusses the noise trade's deep influence of stock market's efficiency. The excessively active noise trades induce the market inefficiency, theexpansion of irrational bubbles, and also form a new market risk-risk based oninvestors' behavior. All those negative effect may weaken greatly the efficiency of stock market, which we verify both on the theoretical and empirical aspects.Chapter 7 advances the conclusion of this paper and the rectification policies of noise trading. We indicate that persistent system innovation, the cultivation of rational market subjects and the criterion of government supervision behavior should be act as the important measures of rectifying noise trade. Among the rest, protection of investors' benefits should be put in the important status all along.The conclusion of this thesis concentrates on the follow aspects. First, this paper gives more comprehensive understanding and newer annotation of the basic definition of noise, noise trade, noise trader and their characters. We think noise is the distorted or illusive information or non-information which cannot reflect the securities' fundamental and lead the market prices deflect from the intrinsic value in different extent. Noise trade means all the trades that lead the securities' price deflecting from their intrinsic value. The borderline between noise trader and information trader is fuzzy and changeable usually. The investor may be an information trader when he trades on information while a noise trader when he trades on noise.Secondly, this paper classifies scientifically the general reasons causing noise trading into 4 categories, including behavioral bias, asymmetric information, principal- agent relationship and market manipulation. We think the general reasons causing noise trade mainly consist in the bias between the value judgment and trade decision leading by bounded rationality of market participants and rational trade behavior, asymmetric information or finity of information disposing ability, the deviation of objective function between deputies and clients conducing by principal-agent relationship, and the market manipulators produce noise trade initiatively making use of the irrational behavior of noise trader in order to implement the purpose of manipulation.Thirdly, this paper classifies the noise trade into systematic noise trade and nonsystematic noise trade. We think systematic noise trade means the noise trade which exists in every securities market, being necessary to constitute market and enhancing market fluidity and cannot be eliminated by the measures such as improving the investors' diathesis or intensifying supervision. Nonsystematic noise trade means the noise trade which results in behavior bias of market subjects and structure or system restriction. This type of noise trade may bring negative influence to stock market but can be eliminated. Through the division, we prove noise trade in China's stock market is more serious than in mature markets just because the overplus of the nonsystematic noise trade, which can be rectified and fathered by policy instruments.Finally, this paper indicates that the behavioral bias of listed company, intermediary institutions and government has deep influence to investors' decision and behavior and exacerbates their behavior bias. Therefore, the behavior bias of these subjects is also important reason of forming noise trade. We also think market system restrict is the deep-seated source of noise trade. System increases and deepens the cognitive and behavioral bias of investors by affecting the mode of information array and the background of information presentation, and then lead to the occurrence of institution noise.