The Comparative Study Of Crash And Jackpot Probability Anomaly In The Us And Chinese Stock Market

In the development of the world capital market,the formation,expansion and bursting of asset price bubbles caused by asset mispricing have been common in human history.Stock markets in the United States and China,as representatives of mature markets and emerging markets respectively,have experienced several stock price crashes,such as the US Dot bubble,the global financial crisis in 2008 and China’s stock market disaster in 2015,etc.The frequent occurrence of extreme changes in stock prices not only seriously damages the interests of investors and undermines their confidence,but also negatively impacts the stability and security of the financial market and seriously hinders the healthy and stable development of the capital market.In 2020,the COVID-19 spreads rapidly all over the world,bringing a huge shock to the world economy and leading to violent shocks in global capital markets.In 2022,the situation between Russia and the Soviet Union suddenly heated up.This"black swan"further aggravated the instability of the international financial market and contributed to the risk aversion of the market.In the international context of increasing financial market turmoil and economic downward pressure,the importance of preventing and defusing financial risks has been emphasized on many occasions in the Government Work Report.How to effectively predict possible extreme return events in the stock market and prevent the potential risks of mispricing stocks is a hot issue to which all sectors of society attach great importance.Therefore,we take the US and Chinese stock markets as the research object.Based on the research context of"definition and prediction→anomaly discovery→anomaly characteristics→anomaly causes",this paper predicts the ex ante probability of stock price crashes and jackpots in China and the United States,and comprehensively discusses the existence,main characteristics and formation mechanism of crash and jackpot probability anomalies.The first chapter presents the background of the article’s topic,study significance,development of the research in the world,research method,research innovation,and gives the research framework and main research contents of this paper.The second chapter makes a comparative study on the development of Chinese and American stock markets.This chapter makes a detailed comparative analysis of the development status of the Chinese and American stock markets from the basic characteristics of the stock market,the historical trend of the stock price index,the events of price crashes and jackpots,etc.The third chapter uses an improved mlogit dynamic panel regression model to forecast the ex ante probability of stock price crash and jackpots events in China and the United States.Firstly,this chapter summarizes the theoretical foundations and related literature on extreme stock returns for both domestic and international markets,and focuses on the cumulative prospect theory.Secondly,we define the stock price crashes and jackpots in China and the United States,comprehensively select various characteristic variables that have predictive power for future stock returns,and use traditional forecasting models to estimate the ex ante probability of extreme returns of individual stocks.The results show that the correlation coefficients between the prediction probability of crashes and jackpots are higher when using the traditional model,and the adjusted R~2values of the two models are small,so the goodness of fit of traditional prediction model needs to be further improved.Finally,we improved the traditional forecasting model by adding the price-to-sales ratio indicator,the GEM or NASDAQ dummy variable for the Chinese and U.S.stock markets,and different market states.The outcomes reflect that compared with the traditional model,the improved forecasting model can better distinguish between the crash and jackpot events in Chinese and US markets,significantly reduce the correlation between the probabilities of crashes and jackpots,and greatly improve the in-sample and out-of-sample forecasting ability of the model.The fourth chapter explores the cross-sectional relationship between the ex ante probability of stock price crashes and jackpots and the expected returns in China and the US,and tests the existence and significance of the anomaly.We construct decile portfolios sorted on the crash(or jackpot)probability and observe the returns on each portfolio realized in month t+2.In order to control common risk factors,we also report the CAPM,Fama-French three-factor and the Carhart four-factor alphas.We find that there is the negative relation between crash probability and future returns,and the positive relation between jackpot probability and future returns in the US and Chinese Stock Market.These cross-sectional anomalies are mainly attributed to the abnormal returns of mispriced stocks with high prediction probability.In addition,compared to the U.S.stock market,the crash probability anomaly is stronger in the Chinese stock market,and the jackpot probability anomaly has size effect.The fifth chapter focuses on the cross-sectional characteristics of portfolios sorted on the crash(or jackpot)probability in the US and Chinese stock markets.Firstly,we construct decile portfolios sorted on the crash(or jackpot)probability.Secondly,we observe cross-sectional characteristics on each portfolio.Finally,we use Fama-Macbeth regression to empirically analyze the relationship between the crash and jackpot probability effect.The empirical results represent that,firstly,stock skewness and institutional ownership indicators of China’s stock market have different trends under different market states:during bullish periods,the predicted probability of price crashes is inversely related to skewness and positively related to institutional ownership,reflecting the investment psychology of domestic stockholders who are keen to chase bullish market.On the other hand,stocks with high jackpot probability tend to have higher skewness,lower price,higher turnover and lower institutional ownership,which indicates that compared with institutional investors,domestic individual investors are more inclined to buy"lottery-like"stocks with high skewness,high turnover and low price,reflecting gambling psychology.Secondly,in the U.S.stock market,portfolios with different prediction probability also exhibit different cross-sectional characteristics.Finally,the results of the Fama-Macbeth regression model suggest that the crash and jackpot probability effects of the Chinese and U.S.stock markets are still not mutually explained after controlling the influence of other firm characteristic variables.The sixth chapter focuses on the crash-jackpot probability effect of different market sentiments and economic environments in China and the US.Firstly,this chapter divides the full sample into high-low sentiment periods,expansion-recession periods,up-down market periods,and high-low liquidity periods sorted on the market sentiment indicators and economic factors indicators.Secondly,we construct portfolios within each sub-period to observe the existence of crash-jackpot probability effect.Finally,we decompose the overall market sentiment into individual investor sentiment and institutional investor sentiment to reveal the asymmetric effects of individual and institutional investor sentiment on the crash-jackpot probability effect in China,respectively.It is found that in the Chinese stock market,there are significant differences in the future returns of decile portfolios sorted on the prediction probabilities across sub-periods.Stocks with higher prediction probability are more prone to mispricing during periods of high sentiment,up market and expansion.Therefore,China’s crash-jackpot effect is more likely to be an irrational bubble influenced by market sentiment,and the irrational sentiment of individual investors is the main reason for driving stock prices away from fundamentals.In the U.S.stock market,stocks with high crash probability are highly overvalued regardless of changes in market sentiment and the economic environment.Crash probability effect is significant in all sub-periods.In summary,the formation mechanism of the crash-jackpot probability anomaly is different in China and the United States.In the U.S.stock market,the crash and jackpot probability anomaly may not be completely due to sentiment-driven mispricing but partly due to rational speculative bubbles.The seventh chapter presents the relationship between institutional investor behavior and crash and jackpot probability anomaly in China and the US.This chapter investigates the association between institutional ownership and crash and jackpot probability effect through portfolio analysis.Secondly,we examine the trading behavior of Chinese and American institutional investors for different portfolios in different periods.Finally,in order to consider the impact of the implementation of China’s margin trading mechanism on institutional investors,we discuss the investment behavior of domestic institutional investors in the three intervals of full sample,before margin trading and after margin trading.The results show that,in the U.S.stock market,the crash probability anomaly is still significant in the portfolios with high institutional ownership,and the jackpot probability anomaly only in portfolios with low institutional ownership,i.e.,high arbitrage restrictions.This is mainly because American institutional investors are more sophisticated.They are able to buy and hold undervalued stocks to capture excess returns in the future.At the same time,at least some of the institutional speculators may ride price bubbles,which has contributed to the generation and bursting of the price bubble.In China’s stock market,stocks with high institutional ownership have better future performance.However,no matter in the stocks with high institutional ownership or low institutional ownership,the anomaly still exists significantly,which cannot be illustrated by previous factor models.This is mainly due to the fact that before margin financing,domestic institutional investors show the behavior of chasing gains and selling losses because of the lack of short selling tools.After margin financing,institutional investors are suspected of riding the bubble,but they do not show vicious selling behavior of overvalued stocks under the government’s policy intervention,which reflects that the government’s policy of reducing holdings plays a certain role in reducing the systemic risk and maintaining the stability of financial markets.This paper confirms the existence of crash and jackpot probability anomaly in the US and Chinese stock market,and systematically analyzes the difference.It has important reference value for regulators and participants in the securities market to discover potential market risks,judge market trends in advance,and scientifically formulate decision-making behavior.In addition,after years of development,the U.S.stock market has a more mature regulatory system and operating mechanism.Through a systematic comparative analysis of the stock markets in China and the U.S.,we can effectively learn from the development experience of mature securities markets and steadily promote the development of standardization,marketization and internationalization of Chinese securities market.