Characteristics Of China's Stock Market: Theories And Empirical Tests

Stock market is an exciting place, for it is not only a place for optimizing social resources, but also a place for wealth redistribution. Since reform and opening, China's national economy has witnessed a sustained and rapid growth. Great amount of wealth has been accumulated in the private sector. Of how to make them contribute more efficiently to the national economic development is an important task of the government, and of how to make them hedged and appreciated is also a pressing issue of their owners. The Party congress report in October 2007 is the first time "creating conditions to enable more people to own property income." While stock market is an important means for people to share the fruits of economic development and to obtain property income. In this context, a deep understanding of the actual situation of China's stock market has much realistic sense.It is crucial to get thorough understand of the actual situation of the stock market before any practical security investment. As China stock market is an emerging market that established in a transition economy, featured with unique institutional environment and immature market environment, China stock market is different from both developed stock markets of western countries and most other emerging stock markets. Existing literature on China's stock market is more in detail problems, while on the market situation overall is relatively few. In addition, the stock market structure and market environment in China has undergone tremendous and profound changes in recent years,, some research and findings in the past, also need to be re-examined along with the market development.Stock market runs mainly to reflect price changes. Numerous factors affecting the stock prices are from various aspects and the factors themselves also change with time. Information about these factors is produced and spread continuously, and processed in different ways by investors, then at last reflects in the stock price through trading. The whole process and system is extremely large and complicated, any attempt to express it in a punctilious way is not possible.Proceeding from the purpose of understanding the price formation process of China's stock market, this thesis features the market from five aspects, namely, market efficiency, market speculation, co-movement with the macroeconomic, the relationship with international stock markets, and market misconduct. Hopefully this thesis can provide some insights to investment activities and further research.Chapter one introduces the research background, the overall idea and structure of this thesis, and domestic and foreign research literature in this area.In Chapter two, the Efficient Market Theory and the test methods is introduced, then the weakly form efficiency is tested in two directions for China's stock market. One direction is the random walk hypothesis testing, and another direction is to try to find a trading strategy by which can obtain excess returns. In this paper, several tests based on random walk hypothesis are conducted, but each gives different conclusion. Anyway, more results seem to support the random walk hypothesis. While in the other direction, a seasonal effect in China stock market is found, that is, the market returns seem higher in November to next May than in June to October. This effect is then tested though a Binary Choice Probit Model method, and the result shows that this effect is significant since year 2000. Then a new investment strategy based on this effect is simulated against historical stock index, and the results show that it benefits far more than "buy and hold" strategy. As a conclusion, this article argues that China's stock market does not reach the weak form efficient market, but should not be simply referred to as inefficient, for it is close to the weak form efficiency. Similar finds are shared by literatures on many other emerging stock markets. As the efficient market theory is initially inspired from the study of mature western stock market, no such market efficient state is defined. Therefore, in this paper, the efficiency level of the present China's stock market is called Low Weak Form Efficient, and the corresponding market is called Low Weak Form Efficient Market. In such market, unexploited arbitrage opportunities may still exist, accordingly, technical analysis may still in efficiency.In Chapter three, starts from the nature and property of stock and stock market to the psychological behavior factors of human beings and the agency mechanism, speculation behavior is systematically expounded, and the excessive speculation characteristics of China stock markets is analyzed. Then, price bubble, as a feature and also a kind of consequence of excessive speculation, is measured. In the measuring of the price bubble in China stock market, all A shares in the market is taken as a whole, Equity Capital Valuation Model is used to estimate the average intrinsic value, and is then compared with the average price to complete the measurement of price bubbles. the intrinsic value of stocks at each moment in the past is estimated based on expectations made at that moment, which is different from major domestic literature, many of them judge the stock price of the past from a current perspective, which may ignore some important factors that has influenced people at that moment. The analysis in this article should be more powerful in describing how market participants judge the market at each moment in the past. So the result here should be more meaningful for market judgment at present and in the future. In particular, an adaptive expectation mechanism is used here, i.e. expectations for the future is assumed basing mainly on experience in the past, since information processing in emerging stock markets is not very efficient, the adaptive expectations hypothesis should be more realistic for China's stock market investors as a whole.Through a number of international comparisons, the paper argues that China stock market shows obvious speculative characteristics. As China's stock market is an emerging market in a transition economy, for the reason of excessive speculation, both objective factors and institutional factors are all involved. Mature stock market needs a perfect market system, appropriate government regulation, regulatory-complied enterprise management, and mature investors. The newly established China's stock market seems has a long way to go.The empirical analysis in this chapter also shows that China stock market witnesses high bubbles in most of the time since 1992, and the highest bubble proportion is 75%, which is produced in 2007 when the market in an extremely speculative state. According to the different fluctuation form of bubbles, time can be divided into two parts, before year 2000, China stock market is overvalued, and the market price bubbles are serious and lasting. After year 2000, stock price bubbles become unstable, accumulate and rupture faster, fluctuate more violently. An overall under pricing situation is also found in 2005, which is never been seen in previous. Speculative feature of China stock market seems not diminished, but even more obvious in recent years. In Chapter four, the relationship between stock market and macro-economic development is theoretically elaborated first, then the relationship between China's stock market and macroeconomic is tested. The co-integration test results show that long-term equilibrium relationship exists between China stock market and those macroeconomic factors, specifically, exchange rate, money supply, production, interest rates, and consumption. This result indicates the stock market co-movement with the macro-economic development in some degree. Granger causality tests further show that one-way or two-way Granger causality relationships do exist between stock market and all macro-economic factors mentioned above. Although the transmission delay between stock market and each economic variable are different, China's stock market fluctuations and changes in macro-economic factors are closely related.In Chapter five, the linking mechanism between international stock markets is theoretically expounded first, in which actual contacts in trade, assets, and bank credit system are considered as the basic factors, and links can be realized by means of common shocks, shocks conductions, and contagions. Increasingly investment and trade activities in recent years between China and other countries have also increased China's international exposure. The link between China stock market and other stock markets should also be closer.A bivariate EGARCH model is used in this chapter to study the interaction between China stock market and other four major stock markets, namely, the U.S., Britain, Japan, and Hong Kong. Mutual conductions of both price returns and price volatilities are tested. The results show that U.S. and British stock markets have significant effects on China's stock market returns, and the influence of Chinese stock market to the U.S., UK and Hong Kong stock market increased recently. The influence of Japan and Hong Kong stock market on China stock market declined, and now Hong Kong market only has volatility impact on China's stock market, and has no obvious effect on market returns. These results suggest that China's influence in the international stock markets significantly enhanced, which is similar to the conclusion of Koch and Koch (1991) and Hamao et al (1991) on Japan's increasing international influence during 1970s and 1980s.An empirical analysis of the dynamic relationship between China and other four stock markets shows more intuitive results, the positive correlation between China and other stock markets increased greatly in recent years.In Chapter six, the purpose and content of stock market regulation is set forth as a starting point, the misconduct feature of China's stock market is discussed from several aspects such as law and system construction, participants behavior, and market supervision etc., then the existence and universality of insider trading and price manipulation in China stock market are empirical tested.The insider trading activities is tested analysis of the stock price changes in a time window period before and after good news is officially announced. The test results show that the cumulative excess stock returns begin and continue to rise 15 trading days before the positive information is officially announced. The cumulative excess stock returns reach the peak exactly in the announcing days and then decrease gradually. It shows that good news has been leaked out in advance before the formal announcement, and those insiders who have bought in advance seem obtain a 14% excess return on average in about 15 trading days.Price manipulation test is then conducted on several representative market indexes by inspecting frequency of the positive yields in every small time intervals. The test results suggest that price manipulation may be widespread in China stock market, and price manipulation behavior has obvious intraday time distribution features. Price manipulation behavior is conducted typically in four periods in a trading day: 10 minutes after the opening in the morning, before the close and after opening at noon, before two in the afternoon, and before the close in the afternoon. These findings should be meaningful for further theoretical research, investment practice and stock market supervision.