A Study On Instability Of Asset Markets In China

With the outbreak of the economic globalization and the economic crisis, factors for theformulation and implementation of monetary policy around countries show characteristics ofdiversity and complexity. Impacts of Financial instability on monetary policy and macro-controlcontinues to expand, it has become one of the important factors affecting the effectiveimplementation of monetary policy. Asset markets instability constitutes a major dimension offinancial instability. Studying the history of the global economy in recent years, there have beenvarying degrees of instability at different stages of asset markets in most of economies. Deepeningand liberalization trends in global finance are more obvious, even more serious is that most ofeconomies are awash with liquidity, coupled with lagging financial regulatory mechanisms,leading to a situation where rise and fall cycles in asset prices are getting shorter, and showingfeatures with volatility clustering and gradually broad fluctuation, situations mentioned aboveresult in instability in asset markets direnctly. For instance, the2008global financial crisis clearlyoutlines formulating and bursting of the speculative bubble in asset markets and its damagingeffects on the real economy. Following economic growth, inflation, employment, asset marketstability and financial stability has gradually become another policy objective of authorities.Monetary policy’s intervention with asset market bubble and its instability and that how shouldinterfere with have become the focus of debate in academia and industry.In summary, this paper mainly expands the study of asset markets instability and interactionsof the instability and economic growth and monetary policy from three levels, namely, the studyon asset markets instability, the research on interactions of asset markets and monetary policy andinterest rates, the study on stock market instability based on investor behavior and growth of theenterprise. Firstly, the paper finds factors affecting market prices from both the internal and theexternal of asset markets, and use Markov regime switching time-varying parameter model basedon state space model to examine instability of stock market and real estate market respectively,and this instability is decomposed into intrinsic and extrinsic instability, and then uses Markovregime switching model to study the impact generated from the instability of two markets oneconomic growth. The main conclusions are: the stock market conduction path of monetary policyis not stable, since2003, the stock market partly realize function of the economic "barometer",and since2010, the response of stock market to the economy has gone into a complete responserelationship region. The main source of instability in the stock market is the external instability,there is an asymmetric impact of stock market external instability on the economy, namely, in highvolatility regime of economic growth, both the inherent and external instability of the stockmarket have no significant impact on the economy, in low volatility regime of economic growth, the stock market’s external instability has significant impacet on economy, but the impact is weak.Most of the time, the overall instability of the real estate market is dominated by externalinstability. During the2008financial crisis, China’s composition of overall instability in realestate market show a significant structural change, during the initial crisis it is dominated byexternal instability, and in the launch of the " four trillion " stimulus plan, the inherent instabilitybecame the dominant. Above that, in the crisis, external factors such expectation of uncertainty ineconomic growth and herd behavior etc. dominate the development of real estate market, andinstability dominated by external factors has led not controllable, and the impact effects on thereal economy has greater uncertainty, and policy authorities then launched stimulus plan in atimely manner to adjust the structure of the real estate market instability, it can be said that thestimulus has immediate effectiveness. There is a clear asymmetric impact of real estate marketinstability on economic growth, in high volatility regime, the inherent instability of the real estatemarket has a significant negative impact on economic growth, while in low volatility regime, theeconomic growth has obvious positive response to the real estate market external instability.Secondly, the paper uses Garch-in-mean SVAR model to study the impact of interest rateuncertainty on the real estate price fluctuations based on data of inter-bank lending rate and realestate prices, the results showed that there are significant negative impacts of20days and60daysinterest rate changes uncertainty on the real estate prices, but the degree of impact is weaker.Relatively speaking, the impact of20days interest rates uncertainty on real estate prices is largerthan that of60days interest rate. The resposes of Real estate price growth rate to shock of both20days and60days interest rates uncertainty is non-symmetric, it is easier to explain that raisinginterest rates can reduce real estate prices, and lower interest rates have limited stimulation on realestate prices. Both negative and positive impacts of additional uncertainty of20days interest rateson real estate prices are greater than that of60days interest rate, this case shows that raisingmedium-term interest rates can increase real estate prices, and stimulus of lower interest rates onmedium-term is limited. In addition, the paper also applied simultaneously short-term andlong-term constraints on VAR model to identify the interdependence of monetary policy and stockprices, the results show that the immediate response of stock price on impact of interest rates isnegative, its long-term impact response converges to zero,therefore,this case solve the long-termpositive effect mystery of Cholsky decomposition. Stock prices have immediate positive impacton interest rates, and this impact does not have long memory.The responses of output andinflation on impact of stock price are lagged and positive. The empirical results of this paperprovide some empirical evidence for determining the benchmark interest rate, the form andimplementation of monetary policy and stable development of the stock market, the effectiveimplementation of macro-control, monetary policy’s transition from quantitative to price-based.Finally, from the perspective of measuring instability of the stock market based on investorbehavior, this paper examines Markov-switching herding behavior of Chinese SMEs board by using Markov-switching model.The results yield evidence of herding behavior under highvolatility and no evidence of herding behavior is found under low volatility. Moreover, the paperinvestigates time varying parameter herding behavior of Chinese SMEs board by usingMarkov-switching time varying parameter model.The results suggest duration of herding behaviorof SMEs board, longer duration goes along with persistent high volatility, the longest durationappears during global financial crisis of2008, and herding fluctuates greatly.Three longerdurations appear before2010, and it gradually get longer, all of durations are short during2010-2012. The paper also investigates the instability of stock market from the perspective of thegrowth of enterprises, we apply catastrophe progression method to calculate the growth index ofthe ChiNext and determine the total share capital of listed companies as a standard weight tocalculate the weighted growth index of ChiNext. The results suggest that the2010weightedgrowth index rose24%in return for the35%decline of2011ChiNext index. The major reasonsinclude two aspects, the first are high price-earnings ratio and high raising funds, although thefactors include macro-policy. This phenomenon overdraws growth of the ChiNext excessively.Therefore, the way of IPO on ChiNext should be changed. Second, most of companies on ChiNextare concentrated in the middle and upper reaches of industrial chain, and they aremanufacturing-intensive enterprises. Such a single structure of the industry as this made thevolatility of ChiNext growth more drastic. Therefore, if enterprises’ IPO of downstream industrychain be encouraged, then the diversified ChiNext industry structure could be expected in thefuture. Meanwhile the stability and representativeness of the overall growth of the ChiNext couldbe improved.In summary, there exist asset markets instability of micro level and macro level in China. Thedegree of impact of instability in real estate market on real economy is stronger than that in stockmarket. In extreme cases, such as the2008financial crisis, the degree of instability in the stockmarket and real estate market are both strong and macroeconomic spillovers are more obvious.Thus, monitoring and regulation of asset market instability should be the main policy tool and animportant route for authorities maintaining financial stability and macroeconomic equilibriumgrowth.