The Empirical Evidence Of Noise Trader Risk In Chinese Stock Market

Traditional financial theory holds that noise traders exert little effect on price, thus noise traders play all but no influence on the formation of asset price. However, in actuality, as a large mount of anomalies which traditional financial theory fails to give explanations come into being, the noise's stochastic impact on price and the effectiveness of arbitrage are disproved by empirical study and the research of behavioral finance theory. These studies show that the impact of noise and noise traders on price is systematic and could spread to most securities, even the whole security market.Based on the basic ideas and main theories of behavioral finance, the review of the classic theories and the expatiation on irrational behavior and cognitive biases of investors, this paper particularly analyzed the formation and characteristics of noise trade and the survival model of noise traders. After the observation of stock market in China, the paper put forward the main conclusion that irrational behavior of investors was remarkable and sensitive to policies, that positive feedback trade severely promotes the fluctuation of the stock price, and that noise trader risk exists widely.In order to measure noise trader risk in stock market in China, this paper made use of the traditional and behavioral capital and asset pricing model by the stock data of listed companies and came into the conclusion that generally the traditional Betas are higher than the behavioral ones, the fact meant that noise trader risk existed widely. Then during the period that the stock market experienced a tremendous fluctuation, the empirical study proved that noise trader risk existed more evidently in the price-increasing period than in the price-decreasing period. This phenomenon accorded with the psychological analysis of different attitudes of investors when the stock price increased and decreased. To be end, this paper formed the market index which reflected investors' emotion by means of reference of the foreign empirical research method.