Research On The Impact Of QFII On China's Stock Market

From September 5th, 2002, when China's Security Regulatory Commission (SRC) and The People's Bank of China together decreed "Provisional Measures on Administration of Securities Investments of Qualified Foreign Institutional Investors (QFII)", to July 9th, 2003, Swiss Bank Corp. invest in Chinese stock market A at the first time. Until September 7th, 2005, QFII's second investment of 6 billion dollars in that market began to be examined. The People's Bank of China and State Administration of Foreign Exchange decreed "Measures on Administration of Domestic Securities Investments of Qualified Foreign Institutional Investors". This series of events indicates that the institution of QFII has been carried out for more than four years in our nation; these qualified foreign institutional investors have been gradually gone deep into China's stock market as well, and the impact of their investing behavior on the entire market has become more and more significant as the amount of their investment became larger. Therefore, the problem that what influence do QFIIs have on China's stock market is always the focus of people's attention, and this is the question this article tries to answer.Previous study mainly based on theoretical research and empirical depiction. The empirical research was much less, not mention to relevant study that based on China's empirical data about QFII institution. This phenomenon partly results from that the time we have practiced QFII institution is not long enough. Besides, since QFII institution is an institutional arrangement for an emerging and incomplete market to take steps to open itself, that is to say, a mature market does not need QFII institution. Hence, this article tries to base its research on China's empirical data before and after the implement of QFII institution, uses econometric methods to study the influence of the introduction of QFII institution on China's stock market.In order to study the influence of the investing behaviors of QFII on China's stock market, this article will begin from the price volatility of the entire stock market, uses rate of return from Shanghai Security Exchange and Shenzhen Security Exchange as price index of stock market. According to particular events mentioned above, this article uses dummy variables for different events, constructing GARCH model to capture the changes of China's stock market before and after various events of QFII happened. The difference of this article from former research which used GARCH model and event analysis lies in that this article includes domestic investors' trading volume as a controlling variable to make the model accurately capture these investors' influence on rate of return. The reason for this arrangement is that the market investment share of QFII is quite different from that of domestic investors. From the empirical results, the writer finds that when gradually entering in China's stock market, QFII institution reduces the volatility of rate of return in stock market, and stabilizes the entire market effectively. In addition, this article conducts a test to see if QFII have herding behaviors after entering China's stock market, and the results show that QFII themselves do not have herding behaviors. These results also show that former conclusion that domestic institutional investors' trading volume reduces the volatility of rate of return in market because of QFII's introduction, results from domestic institution and small and moderate investors' imitation of QFII's investment philosophy. This condition will disappear as China's stock market being gradual open and domestic investors being more mature.Based on the empirical study, this article thinks that the implement of QFII institution is conducive to China's stock market being more open. The invest behavior of QFII helps to reduce entire price volatility of China's stock market. Therefore, the writer suggests that QFII institution should be improved to a larger extent to facilitate the opening of China's stock market. In addition, this article also suggests China's government to promote the self-construction of China's stock market, strengthening financial regulation, raising the level of risk prevention, and improve the quality of domestic investors, especially the quality of institutional investors.