China's Stock Market Price Volume Relationship Study

The development of China's stock market requires a better understanding about the risks in stock market. When crises or unusual changes appear in the market, we would be able to monitor a series of changing index and thus properly regulate and control the stock market in order to guarantee an orderly and healthy development of the stock market.In modern financial theories, all elements (both external and internal) have effects on the stock market, which is inevitable to be reflected in the market behaviors. So, trading volume and volatility turn out to be the basic variables to describe the security returns and risk features. Trading volume and volatility have the advantages of being easy to obtain and monitor. If we postulate "market behaviors reflect all information", we can discuss what roles risk plays in the stock market according to the analysis of the relation between trading volume and volatility. And macro-regulation can also be adopted according to the relation. This paper researches the relation between trading price and volume in China stock market; objectively reveal the regular changes between them. On this base, suggestions can be put forward for market supervision and policy enactment.This paper is organized with the following logic: firstly, whether the relationship between trading price and volume exists or not; secondly, what relation exists; thirdly, how does the relation embody; forthly, what are the similarities and differences between the embodiments in different market development periods; fifthly, how to establish relative theory and model to explain the conclusion drown above; and finally the paper put forward the suggestion for policy enactment.According to the research clue mentioned above, we firstly carry out descriptive analysis about all of the trading price and volume indices and test the unit root. Every index shows great differences in three different periods—the period before the limit of highs and lows practices; the period after the limits of highs and lows practices, but before the security law is enforced; and the period after the enforcement of the security law. So, we carry out the research period by period. The result of unit root test shows that both the return ratio and trading volume are stationary. As for the Shanghai index return ratio (SIRR) and volume ratio volatility (VRV), we apply Granger Causality test based on the Vector Auto-Regression model. In the end, such conclusion is drawn that Granger Causality exists between SIRR and VRV, and such causality is substantial in both the whole period and the individual periods.In order to further investigate the specific embodiment of the relation between SIRR and VRV, we apply the VAR model, its derivative impulse and variance decomposition methods to carry out our analysis. For the whole period, VAR illustrates that seven-stage lagged VAR explain the relation between SIRR and VRV better. That is to say, the mutual effect relation between SIRR and VRV in 7 transaction days is statistically substantial. The result of Impulse response function shows, in the first period, the shock from VRV has a certain degree of effect on the SIRR. From the second period, the shock from VRV has a certain degree of effect on the SIRR, but the SIRR has a stronger self-impulse response. However, impulse response for both VRV and SIRR series is gradually weakened in the three periods and eventually disappears in nine days, which illustrates that the mutual impacts between SIRR and VRV can be absorbed in 9 days and the system is robust. From the research about Shanghai index in different development periods we can draw the following conclusion: in period one, China's stock market is extremely unregulated. SIRR and VRV are very high, and the responses to the shocks are strong. Ten days are needed before they completely absorb the shocks. The market is extremely unstable. In period two, the limits of highs and lows begin to practice. The swings of daily VRV thus decrease. Their responses to mutual impacts are contr...