Study On The Factors Of China's Stock Market Volatility

The basic function of the stock market is to guide the rational allocation of resources, which depends on the constantly occurring fluctuations in stock prices. Thus, the fluctuation is regarded as the most essential feature and the.inherent basic property of the stock market.Although the rational allocation of resources depends on the stock price volatility, but only the moderate fluctuation can make the resource effectively allocated. Stock market operation is not aimed to eliminate fluctuations in the ideal state, but to achieve moderate fluctuations. Moderate volatility means that the stock price should fluctuate with proper frequency and within reasonable limits.Fluctuations in the trend of stock index should be essentially coincident with the national economic development, to reflect the overall state of the national economy.Meanwhile, such factors as changes in national macroeconomics policy and monetary policy, changes in corporate value and investors'concept as well as macroeconomics'boom and recession could be reflected by the rise and fall of the stock index.In terms of the Chinese stock market, tremendous achievement has been made after the development of last two decades.However, because of the particularity of the Chinese economy and the fact that the financial system is in transition stage, as well as the release of many contradictions in the process of marketization, the Chinese stock market,plagued by abnormal fluctuations of the stock prices, is still immature.We must study the volatility of the stock market in depth in order to let the investors in our stock market make their right investment choices, reduce losses,maintain a long-term, stable and healthy development of national economy. The main task of this thesis is to find the root causes of the abnormal fluctuations of the inland stock market.This paper is divided into seven chapters. Chapter 1:Introduction, including background and significance of this research, review of domestic and foreign research literature and arrangement of content and systematic structure of this thesis.Chapter 2:Development of China's stock market and its volatility features. Describes the development of stock market and clarifies the factors which impact on stock prices.Explains the generality and specificity of the inland market fluctuations through analysis of the stock market.Chapter 3:Macroeconomic variables and its impact on stock market fluctuations. This chapter introduces the vector auto regressive(VAR) model and the research process, gives detailed definitions to such macroeconomic variables and proxy indicators of stock prices as industrial value added that stated in the thesis. Studies the intensity and continuity of the impact of macroeconomic variables on long term stock market returns, with foreign research findings compared.Chapter 4:Behavior of investors and stock market volatility. This chapter begins by using the basic principles of behavioral finance to analyse basic characteristics of behavior of investors, and the impact of fluctuations on the stock market. The over-reaction test is based on this outcome and the utilization of De Bondt & Thaler's classic empirical methods and latest data and sample of Chinese stock market,and the results are compared to analyse the similarities and differences between the outcome of different periods.Chapter 5:The effect of policies and stock market volatility. This chapter attempts to analyze qualitative and quantitative methods to measure and evaluate impact of policy events on the stock market volatility and find the laws behind the events. And different from most studies, the chapter first uses statistical data to compare the policy factors in different periods of unusual volatility, followed by the use of event study method, to research the features of China's stock market volatility and policy events.Chapter 6:Institutional factors and stock market volatility. The thesis first analyses the changes in China's stock market system, the basic characteristics in comparison with the mature stock markets, to analyse the institutional defects of China's stock market and the negative impact on the stock market. Chapter 7:The main conclusion of this paper and policy recommendations to the stock market. The main content of the paper is summarized, some relevant policy recommendations are proposed.The main idea and innovative viewpoint:1. The volatility of our stock market is analysed through comparison of the market data of the last fifteen years internationally. It's concluded that China's stock market volatility doesn't act in fully accordance with the GDP of China.As the domestic gross price grows steadily, the stock market fluctuates drastically. More than this,in China,there is remarkable relationship between government actions and stock market fluctuations, and the later is too frequent and furious before or after policy regulations. In general, frequent and intense fluctuations always lead to shortsightness and herding behavior. On the other hand,these behaviors play the role of katalyst to deteriorate the overall situation.2. An empirical analysis is made on the macroeconomic variables, investor behavior, policy effects and the volatility of the stock market.The conclusion is that the stock market is often deviate from trend of China's real economy under current situation,let alone being accordant with the later. Domestic investors are psychological affected by cognitive bias.Overreaction do exists, and it's unique due to the peculiarity of national circumstances. For instance, overreaction in short term is not as visible as that in long-term.The reason is that the trend is under influence of loser portfolios tortured by their own performance problems. China's stock market is highly sensitive to national policies. Policy alterations will lead stock market to severe fluctuation.However the fluctuation will gradually slow down,and the influence on the overall trend of the market will also gradually weakened in the coming period.3. Studying the system of factors on stock market fluctuations from the system level, it's clear that compulsory institutional changes has brought rapid development,accompanied by many system deficiencies.Analysis has been made to describe the fluctuating influence of the institutional deficiencies on both sides of stock shares and information disclosure mechanisms.Major shortcomings of this article:China's stock market results from the transformation from planned economy to market economy, is still immature and will remain in transition stage. More effort is required to study the factors that cause stock market volatility, especially those policy and institutional factors that impact on the stock market. In addition,although behavioral finance theories is used to research cognitive bias of individual investors and transmission pathway of "herding" among the investors' group, the study is far from perfect,and investigations for these phenomenons will continue for a long period to come.