Study On The Contagion And Flight On The Chinese Stock Market

In pararell with the fast-growing economy in China, its capital markets has been rapidly developed and become more and more mature in the last twenty years. However, at the same time, the Chinese market system and regulation are not running very well, and compared with sotck markets in developed countries, e.g., US, the Chinese stock market is still very unmature. For instance, the Chinese market is still segemented, and individual investors who have less sense of risk management still dominate the market, and the market is still very speculative with many inside trading and manipulation on stock prices. These facts increase the risk for investors on thte market, and also the difficulties of risk management.This thesis discussed the issue of risk management on the Chinese stock market from the viewpoint of investor behavior through discussing the effects of common factors, contagion and portfolio rebalancing on cross-stock interactions. The theories of asset pricing, market microstrucutre are used, and stock market liquidity, order flow from tick-by-tick high frequency data are computed, and classical financial market econometrics models are applied. In addition, this thesis also discusses the risk premium difference between stocks and its system. This provides a new way to analyzing asset pricing.First, this thesis examines within-market flight behavior in the Chinese stock market through analyzing relationship of order flow, liquidity and returns between stocks with different market size and their interaction with China Interbank Offered Rate (CHIBOR) and forward rate of Chinese Yuan (RMB). The empirical results show that a rise in order flow for low-size stocks will lead to a fall in returns and liquidity for high-size stocks. There is negative bidirectional lead-lag relationship for returns and liquidity for high and low-size stocks. Macroeconomic or monetary liquidity factors such as CHIBOR and forward of RMB will affect microstructure variables such as liquidity, order flow and returns of stocks, but have different effect on high and low-size stocks. This paper provides evidence of within-market flight behavior between high and low-size stocks. Further tests find that this within-market flight exists also between other stocks with different levels of risk and liquidity.Second, this thesis discusses within-market contagion and flight between high and low-size stocks on the Chinese stock market based on previous studies in cross-market contagion and flight. Our empirical results show that when market order flow and liquidity rise, the probability of high return exceedance between high and low-size stocks significantly rises due to the effect of common factors. However, after the effect of common factors is removed, when market order flow rises, the probability of low excess return on high-size stocks accompanying with high excess returns on low-size stocks rises, and when market liquidity falls, the probability of low excess return on low-size stocks accompanying with high excess returns on high-size stocks rises. Market common factors should be responsible for contagion between high and low-size stocks, and there is significant within-market flight between high and low-size stocks after the effect of common factors is removed.Third, Based on previous literature on cross-market flight behavior, this thesis examines within-market flight-to-quality and flight-to-liquidity behavior on the Chinese stock market. Empirical results show that there is significant flight-to-quality behavior between high and low-βstocks, between high and low-size stocks and between SH180-index and non-SH180-index stocks, and there is significant flight-to-liquidity behavior between high and low-spread stocks, and between stocks with high and low price impact coefficients. In both flight-to-quality and flight-to-liquidity, investors have no preference for stock book-to-market ratio. Moreover, different from the results in foreign mature stock markets, due to the special structure of investors and their investing preference in the Chinese stock market, there is no evidence of flight-to-liquidity between high and low-size stocks or between index and non-index stocks.Finally, this thesis analyzes the correlation of returns among the Chinese stock market, Treasury bond market and corporate bond market and finds that the correlations of returns between the Chinese stock and Treasury bond market or between stock and enterprise bond market are marginal positive. However, there are negative correlations between the stock and bond markets when returns fall and volatility rises on the stock market or returns on the bond market rise. Due to the effect of common factors, return correlation between the Treasury and corporate bond market are highly positive, which become even stronger when returns fall and volatility rises on the bond market. However, the positive correlations may be very low or even insignificant when the bond market is calm. There is evidence about flight-to-liquidity or flight-to-quality both between the stock and bond markets and between the corporate and Treasury bond markets.