Behavior Finance And It's Application In The Stock Markets In Our Country

The stock market in our country is influenced greatly by policy; individual investors are in a great proportion in this market; the exchange rate and P/E of stocks are comparatively much higher; information asymmetry is also very serious. For the reasons mentioned above, the modern finance theory which is based on EMH is not a appropriate tool to analyze this market. On the contrary, behavior finance (BF) is a much more effective tool. BF disapproves the over-simplified hypothesis of EMH and analyzes stock price volatility in view of practical decision-making characteristics of investors. This paper analyzes the latest development of BF and applies this theory to make some research on the stock market in our country.In the first 4 chapters of this paper, I analyze the characteristics of the investors' decision-making and interpret the market anomalies in view of BF. I also analyze some important BF models, which are prospect theory, behavioral asset pricing theory and behavioral portfolio theory.The fifth chapter is the core part of the whole paper. In this chapter, I try to make some research on securities market in our country with the thought of BF. First, I make an empirical test of prospect theory and find investors are not always risk-aversion. In fact, according to different conditions , they will change their attitudes toward risk. They detest risk when they are in a profit and seek risk when they are in a loss. Second, I make some empirical research on the influence of important policies on investors and explain it with the theory of BF. I also bring forward some policy recommendation that government should make clear their roles and regulation institution should not control stock index directly and should try to reduce the impact of policy on market to the greatest degree. Third, I make some positive research on herd behavior. The result proves that not only individual investors but also investment funds show herdbehavior. I explain this phenomenon and analyze it's negative effect on stock market. I also recommend that information should be produced more efficiently and supervision should be enforced. Fourth, I analyze noise trade and it's impact on securities' price. Besides, I analyze the mechanism of how noise trade leads to bubbles. Finally, considering the stock market is not fully efficient and there is both over-reaction and under-reaction in the market, I make some empirical research on the momentum strategy and reversion strategy. According to the study, we recommend that the best investment strategy for individual investors is reversion strategy and momentum strategy is, on the contrary, a very bad choice.Hou Yongjian (Finance) Directed by- Piao Ming gen...