A Research On Investors' Correlated Strategy And Stock Market Anomalies

Investor behavior has long been ignored by the neoclassical finance theory, which regards people as rational and presumes that the decision making process of investors is completely rational. With this assumption, neoclassical finance theory presumes that the market is efficient, information will be immediately absorbed by the price, and market returns cannot be predicted. According to the theory, the stock market follows a random walk process, there is no opportunity for a long-term arbitrage and there is no way to beat the market through professional portfolio investment either. However, stock market volatility is a very complicated phenomenon, the rigorous and unrealistic theoretical assumptions of neoclassical finance theory makes it in a hard position to explain the various financial market anomalies. But these same anomalies lead a way to the development of behavioral finance theory.The behavioral finance theory came into being in the 1960s. Inspired from some common human heuristics biases such as representativeness, conservatism, etc., it has been established on the basis of game theory and econometrics development. By incorporating psychological factors into people's decision-making process, Behavioral finance presented some theory and models, and uses these theory and models to explain various financial market anomalies, which fits the market very well and has gradually been accepted by the public.In recent years, international stock market crisis erupted one after another, from the Southeast Asian financial crisis, to the year 2000 dotcom bubble burst and then to the 2008 US Subprime mortgage crisis. Chinese stock market index suffered from a high of over 6000 point to a low of 1800 point, a rollercoaster ride concussion. The lessons of history repeat again and again, why humans always continuously repeat their mistakes?As all the macroscopic behavior can be reflected by the microscopic motivations, this paper tries to explore stock market abnormal fluctuations from the angle of investor behavior. We adopt a comparative study method, comparing the modern finance theory and behavioral finance theory in hypothesis, analysis method and empirical tools. Through comparison, we find the deficiency of modern finance theory in explaining stock market anomalies and rationalize the use of behavioral finance theory in this context.For the main body of this paper, we adopt a combination analysis of theoretical construction and econometrical examination. Our main intention is to explore how rational investors give up their independent strategy and follow the noise traders instead of adopting value strategies. After that, we examined the correlative strategies of Chinese investors by empirical studies.This paper is consisted of three parts,6 chapters altogether. It is unfolded according to the sequence of proposing the question, analyzing the question and solving the question. The first part, including the first chapter and the second chapter, puts forward the question; the second part, including the third chapter and the fourth chapter, is to analyze the problem both theoretically and empirically; the third part, including the fifth chapter and the sixth chapter, is to solve the problem, draw a conclusion through comparison, and propose relevant policy suggestions.The structure of this paper is organized as follows:Chapter one introduces the research background, purpose and structure.Chapter two reviews relevant literatures and compares the differences between modern finance theory and behavioral finance theory in hypothesis, analytical methods and empirical instruments.Chapter three is the theoretical construction of dependent trading strategy of investors. We incorporate Agent-Principal model into the HS model. First, we construct a basic noise trading market model by setting a noise trader and a rational arbitrageur in a market. We analyze how the rational arbitrageur give up his independent strategy and follow that of the noise trader's when facing the noise trader risk. Then, we extend the model, and analyze how the stock price further deviates from its fundamental value after the first wave of noise trading.Chapter four is empirical analysis. We first make a comprehensive analysis of investor's irrational heuristics biases. Then we focus on testing the policy reliance bias of Chinese stock market investors. Our empirical analysis mainly including the following three aspects:(1) to examine the existence of noise trading behavior of investors; (2) to measure the herd behavior of Chinese stock market investors; (3) to examine momentum effect and reversal effect of Chinese stock market.Chapter five is to compare our results with those from developed and emerging financial markets and analyze the reason of differences. Chapter six is the conclusion. It summarizes the whole paper and put forward some relevant suggestions for improving the efficiency of Chinese stock market.