Security Investment Funds And Volatility On Stock Market

In the course of China stock market developing for nearly two decades, the structure of investors dominated by individual investors has always been regarded as one of the main factors, which lead China stock market to extreme fluctuation. In this background, to develop China securities investment fund (SIF) vigorously is to exert its function in order to stabilize the market. However, there existed large deviations between the actual effect of SIF market operation and the expected. How SIF influence the market, and whether SIF has the functions to stabilize the market, the questions attracted attention and research widely.Firstly, on the basis of finance and investment theory, such as portfolio theory, efficient market theory and behavioral finance theory, the paper analyses SIF theoretically from several aspects, such as rational investor characteristics, principal-agent theory and portfolio theory, and draws the following conclusion. SIF has no motive to stabilize stock market. It has double-sided, and should not be beneficial or adverse absolutely of the choice of its behavior and its impact on stability of stock market. It is restricted by factors, including satisfactory level of SIF management structure and institutional arrangements for securities market. Only under the premise of certain internal and external conditions being available, SIF could play a stabilizing role on stock market with the conduct of SIF standardized. Otherwise it would increase stock market volatility. From investment behavior and portfolio two main lines, the paper analyses SIF theoretically from feedback trading strategies, herding behavior, position ratio, shareholding concentration and periods.Then, the paper attempts to use the parametric method (such as ARCH Models) to conduct an empirical study about the impact of SIF on China stock market. The paper uses GARCH (1,1) and EGARCH(1,1) models to conduct statistical analysis and data fitting of all workday data of Shanghai A-Share Index and Shenzhen A-Share Index. With the introduction of SIF as a dividing line, it compares the variations of stock market volatility and evaluates whether the volatility structure of the stock market has changed. The empirical results consider the introduction of SIF did not stabilize China stock market or reduce China stock market volatility. There exists an obvious ARCH effect on China A-share market. After SIF entering the market, the level of volatility has not been dropped, and characteristics of volatility change as stock market cycle changing. When the market is suffering a downturn period, SIF reduces the volatility of the stock market periodically; when the market is rising period, SIF rather than exacerbated the volatility of stock market. The volatility of China A-share market exists obvious negative "leverage effect" only when the market is Declining period. Negative messages produce a bigger impact on stock market volatility than positive messages. It shows SIF play a significant role to exacerbate. And there exists positive "leverage effect" when the market is rising period. The empirical result does not support the policy intention that China securities regulatory authorities develop SIF and other institutional investors to stabilize the market. The result is inconsistent with the conclusions that many scholars at home and abroad consider that SIF could stabilize stock market, or reduce volatility of the market.Further, the paper tested empirically on mechanism of SIF affecting stock market volatility. Regarding SIF investment behavior, there exist obvious positive feedback trading strategy effect and herding effect on stock market. Regarding SIF investment portfolio, position ratio of China SIF has different positive or negative effects on stock market volatility at different periods, and negative effects are more pronounced in most cases; China SIF maintains a high level of shareholding concentration basically, which has a more pronounced positive correlation with index volatility of A-share market; At present, Most of China SIF belong to medium-term or short-term investment, that is, they hold shares period less than two quarters generally. The empirical results show that China SIF haves not been stabilizing effects on stock market, and sometimes instead aggravate the stock market volatility in China in different market cycles.Finally, on the basis of theoretical and empirical analysis conclusions, the paper analyses the causes from stock market and SIF itself two aspects why China SIF could not exert the function to stabilize the market. After establishing a reasonable position on developing China SIF, the paper makes relevant policy recommendations.