A Study On Transmission Mechanism Of The Resonance Effect Of China's Stock Market

With the outbreak and influence of the international financial crisis, China's securities market has entered a vicious cycle. The reason of stock market volatility, of course, is not only including the market factors, but also the fluctuations of investors' psychology and behavior. The latter reason cannot be ignored. In recent years academic circle has believed that the "herding behavior" is the main reason leading to the fluctuations of stock market. But this article question the "herding behavior "and consider the hypothesis depart from the nature of investor behavior, not on the phenomenon of irrational market fluctuations and make scientific and rational explanation.Accordingly, I propose a new hypothesis named "resonance effect" on the stock market. The underlying causes leading to above phenomenon is:the investors' cognitive bias on micro-level market information induced the stock market "resonance effect" on macro-level. With the help of definition in physics, "resonance effect" is introduced to the study of financial markets in this article with the concept of subjective and objective volatility. The resonance occurs when the frequency of subjective volatility is consistent with the frequency of objective volatility. The subjective Volatility is developed through a cognitive process which can be divided into three stages, namely:the acquisition of objective information stage, the processing of objective information stage, and the formation stage of investment decision. Investors may make several types of cognitive errors, which will increase the subjective volatility.This basic content and micro-mechanism of the resonance effect is analyzed and discussed in detail in this article. Beginning from investors' cognition process, clarify the conduction mechanism of resonance effect. It is concluded that cognitive bias is the root cause of the resonance effect. It gives a further description by creating a mathematical model of the resonance effect and established a simple and effective way to test the existence of resonance effect in the Chinese stock market. Finally it present the investment policy and strategy recommendations based on resonance effects.