Study On Mechanism Of Abnormal Volatility And Volatility Suppression In China's A-share Stock Market

Stock price volatility is a natural feature of stock market. Based on different opinions of future stock cash flow and other factors, different investors have different expectations. They will have different views on the current reasonable stock price. Therefore buyers and sellers emerge as well as market transaction. The stock price varies time to time, which forms the stock price volatility. Reasonable price volatility contributes to finalizing the transaction, forming market liquidity, which essentially reflects the market functions.Since China A-share stock market was establishment, there had been a number of huge shocks in the market. Such frequent and drastic fluctuations on one hand have negative impacts on healthy and stable market development. On the other hand, it brings investors higher systematic risk. These abnormal fluctuations in the A-share stock market are due to political factors, but it is also related to the deficiencies of internal 'stabilizer' mechanism and so on. Meanwhile, the listed companies with low quality primarily focusing on financing widely exist. Small investors are apt to lose minds, and institutional investors are difficult to play the role of stabilizing the market within the current existing system. The issues mentioned above lead to the frequent and huge fluctuations. This paper started with market volatility of China A-share stock market, followed by the market 'stabilizer' mechanism and its practical effects, policy issues, quality of listed companies with market volatility, investors structure and behavior with the volatility suppression, market micro-structure and supervision, explores the internal mechanism of drastic fluctuations in China A-share stock market and the relevant approaches for suppressing.The main content and conclusions of this paper are as follows:①This paper reviews the literatures of theories and models of stock price volatility, price volatility mechanism and volatility suppression. It describes the characteristics of China A-share stock market volatility in terms of statistical analysis and self-development compared with mature market. Moreover it states resonance effects relied on the formation of peaks and troughs in drastic fluctuations, and talks about why the resonance effects happen.②It expresses the current 'stabilizer' mechanism in A-share stock market and its practical effects in the aspects of both internal and external market. It additionally gives recommendations on reforming and deepening the current A-share stock market 'stabilizer' mechanism.③It explains the main political issues since the establishment of China A-share stock market, pointing out that speculations, easy-to-form mental groups, policy sensitive and policy-dependent generally exist in investors. The characteristics of over-panic and over-confidence as well widely exist. The existence of these characteristics is apt to form mental groups, which result in the investors losing rational thoughts. The market cannot absorb the impacts of the policy issues effectively when it comes. It often over-responses, positively or negatively enlarges the policy effects. It is consequently easy to make an intense short-term raise or decline of the stock market. The market has a huge fluctuation afterwards. It following reveals some advice on completing the essential market system, improving the quality of listed companies and vigorously developing new institutional investors on the aspects of reducing policy issues, effectively control the psychology of investor groups.④This paper applies the fitting coefficient (R2) in asset pricing model to capture the synchronous price volatility and studies the relationship between the quality of listed companies and market volatility. The results reveal that: the synchronization of stock price of high-quality companies in bear market is significantly lower, which is helpful to reduce market volatility, but in bull market, the effect on stabilizing the market is not significant. The synchronization of stock price of low-quality companies in both bull and bear markets is higher, which intensifies the market volatility. In bull market, the stock price rising or falling together, to a certain extent, determines the cumulative abnormal return (CAR). In bear market, the synchronization of stock price reduces the CAR of high-quality companies, and CAR of low-quality companies does not have a significant relationship with the synchronization of stock price.⑤It proves the relationship between holding behavior and market volatility from institutional investors' point of view, and divides the institutional investors into funds, brokers, social security, QFII, insurance companies, and corporate legal persons. The results show that: in different market environment, institutional investors sometimes increase the price volatility, and sometimes to reduce the volatility. The behavior of institutional investors does not have a linear relationship with market volatility, but rather reflects a more complex non-linear relationship. It can not be simply viewed that rapid development of institutional investors will be effective to suppress the intense and frequent market fluctuations in the A-share stock market. It should be clearly recognized that, in a finance-oriented and the lack of consistent growth of performance of listed companies and the uncontrolled systematic risk market, the development of institutional investors may not to reach the expected achievements. In fact, the elements those are good business prospects, stable growth of performance, and timely information disclosure, ideal market supervision are the key to stabilize market development.