Study Based On The Noise Of The Chinese Securities Market Transactions

Rationality and Efficient Markets Hypothesis are two premises in modern financial theory. And noise trade will not influence the market price. Traditional finance economists hold that noise traders will be washed out because of their inferior position to arbitragers and noise will disappear in the end. But in recent years, both the anomalies in security market and irrational tests on investors approved that noise traders actually have long and significant effects on the price of financial assets. So, the noise trading theory is introduced into the finance market in recent years.The thesis is a formal investigation on the noise trading in security market. On the basis of an overall citation about the related literature, the survival mechanism of noise traders is analyzed from internal and external causes. As follow, a detailed introduction is given to DSSW model. We did correlation analysis on discount of closed- end funds on Shanghai Stock Exchange with data from Oct,1998 to Jun,2007. And considering the specialty of Chinese security market, we introduced policy noise as another big noise source. Chinese security market, which is different from developed finance market, however, is a "policy stock market" we can conclude by event study algorithm and empirical research on influence deduced by policy in china stock market. Policy noise is the primary reason that results in a series of marked noise trading phenomena such as frequent deals, dramatic volatility, assets overpricing and so on in china stock market. At the end of this paper, put forward several suggestions on policy.main conclusions: 1,bounded rationality and cognitive bias are fundamental factors leading to noise trade . Limited arbitrage prevents more rational investors entering the market, so noise traders can survive in long period. 2,noise trading theory can explain closed-end fund discounts and noise trading is tremendous and serious in China. 3,Policy noise is one of main reasons for so much noise trading in china stock market.