Study Of China's Stock Market, Noise Traders

A large quantity of western finance literature has documented that individual investors in the capital market trade excessively and prefer to hold risky stocks. And, these performances of individual investors are due to their overconfidence and loss-aversion. Analyzing tick-by-tick transaction level data in September of the year 2006 for component stocks of Shanghai Stock Exchange 50 Index (excluding Shandong Aluminium CO., LTD.), I find that individual investors in China, who lead their life in Eastern culture which is entirely distinct from Western culture, their trading behavior is systematically correlated to some extent, prefer to hold stocks of small companies (the market value of the company is small), trade too much, like speculating in short period instead of investing for a long term. Furthermore, the trading behavior of Chinese individual investors affect the stock price little. After the share merger reform of the stock market in our country, the market value of these 49 stocks is reasonable, does not deviate from their fundamental value greatly, and the pricing mechanism of our security market has been improved. The existence of noise trades that performed by individual investors, can raise the liquidity of the stock market and activate it. However, excessive noise in the market may cause"bubbles"emerge. And when"bubbles"burst, it may induce financial crisis. At last, it may result in unstable situation for the society. Hence, it requires that, the education for investors to invest rationally should be reinforced and the information disclosure system of the listed companies should be improved go step further. Besides, there are also more requirements for finance regulation authority to strengthen market supervision over the listed corporations.