The Small Effect Of China's Stock Market Empirical Research

By using serial correlation test and Cross-section test through the data of the share companies that were listed in Shanghai Stock Exchange before 16th oct 1998, the size effects in China stock market was tested in the period from 16th oct 1998 to 26th oct 2001.All the share companies which in total 373 were grouped into 11 according to four different criterions.These four different criterions were total circulating captal stocks, total circulating market value, total capital stocks, total value of a share company.Through the correlation test between the abnormal return rate and the size of the group, no size effect was found through the size criterion of the total value and the total circulating value except only one period. The total capital stock of a share company were proved to be the best criterion and the size effects were found to be much more obvious,the second best crierion is the circulating capital stock.Even though,the size effects were not proved to be existing through all the periods that were tested.It is proved that the size effects were periodical and highly correlated with the changes of policy of the stock market.When the iliquidity risk was not included in the test, the size effects was proved to exist in china's stock market.From the reality of China's stock,it is believed that the abnormal return can be accounted for by the illiquidity risk caused by manipulation.To verify the hypothesis,the turn-over rate,fluctuation of turn-over rate,the rate were introduced into the study.This study provided a joint test of the factors above. It was found that the abnormal return rate was an increasing function of the turn-over rate of the group.It seemed to be ridiculous, but it was right because the turn-over rate was highly correlated with the fluctuation of turn-over rate beneath which was often the manipulation risk. Even no manipulation existed , high fluctuation mean high risk that should be compensated with high return rate. The adjusted R Square of the illiquidity risk was found to be 62% in the multi-factor regression,and the effect of size factor decreased greatly,the contrubtion rate of the turn-over rate was 70.95%,and the size was 29.05%.That means that the abnormal return rate is mainly at the expense of illiquidity risk.Even though ,the size effect still existed in the periods that were tested.This paper includes five parts.The first is to review the study on the subject;The second is to discuss the characteristic of Chian's stock market .. the change of Money-admitted policy and the questions on the study. The third is to verify the size effect in China's stock market by using correlation test and regression test on the bases of four different criterions ,each criterion will be applied with two time-series methods.The fourth is to summary the main character of four different criterions,and apply joint test to the criterions that were proved the best concerning the size effect.The illiquidity risk was introduced to the study,the indexes of turn-over rate and the fluctuation of turn-over were used here.However ,other factors that may influence the invest return rate as circulating rate and size were also included.According to the result,the size effect will be interpreted.The fifth is to summary the size effect and its explaination,and then to provide some useful invest strategies based on the conclusion above.