An Empirical Analysis Of Noise Trading In China's Stock Market

Based on the noise trading theory of behavioral finance and combine with the characteristics of Chinese stock market, this paper carries out theoretical and empirical analysis on the noise transactions of China's stock market. First, we set up a Market-Single Stock's heteroscedasticity test model (VMRT) to select the samples of the stock with noise trading. Through this analysis of the selected samples, we find that the noise trading stocks are mainly come from Shanghai, Guangdong, Jiangsu and Zhejiang regions, and most of them have two characteristics: bad performance and small-cap. Then we construct a noise trading portfolio by the selected samples and calculate its rate of return, we test the explanative power of the basic economic variables to noise trading yield and then extract the yield of noise trading by the S-Volterra nonlinear polynomial model.The Granger causality test between noise yield and basic economic variables shows that there is an interaction relationship between noise trading and noise trading portfolio. Both the change of new stock account and the promulgation of bull policy will cause the noise trading, fair market risks arising from the noise trading, the new information of the industrial added value can reduce the noise trading. Finally we analyze the relationship between the noise trading and economic variables which have a significant impact on the noise trading by the impulse response function analysis of VAR model. We find the new information of noise trading portfolio yield and noise trading yield have a positive impact on themselves, while the responses of the two variables are negative when the impact of the new information are come from other variables, and the impacts of shocks mainly concentrated on the first three to four periods, all of the impacts have shown the characteristics of short-term behavior, and the performance of the impacts show asymmetry and negative characteristics.Based on the above empirical analysis, it is concluded that there are six types of characteristics of noise trading in Chinese stock market: (1) Noise traders have long-term survival. (2) Noise trading yield has a character of superimposed effect. (3) During the abatement of noise trading, it shows a character of over-reaction. (4) No news is bad news in the stock market. (5)The biggest factor that impact upon noise trading is the stock market noise. (6) The disclosure information of economic fundamentals would reduce the noise trading.In terms of investment, these conclusions are useful for individual investors. In order to effectively prevent and control the risk of stock market noise trading, some investment strategies are given as follows: First, in order to avoid blindly following the noise trading, all of the individual investors need a correctly understanding of the bad performance of small-cap stocks. Second, investors should have their own judgment on economic trends and the value of a single stock, so they can prevent themselves from following the crowd noise trading. Third, all of the individual investors need to folly know the relevant information about the stock market, a clear assessment of bull or bear policy news.