The Empirical Research On Herd Behavior And Positive Feed-back Trading In China Stock Market

Financial asset bubble has always been one of the hot issues in the research field of economics and is also prevalent in the world. There are many famous bubble events in the long river of human history, such as the tulip bubble in Dutch, the Mississippi bubble in France, the South Sea bubble in the UK, and the 1929 stock market crash in the US. Since 2007, the stock market in China has been experienced a fast conversion, which gave the Chinese economy a heavy blow. It's not difficult to see from the dramatic shocks in the stock market that the persistence of speculative bubble has been changed the operation of macroeconomic and the stability of financial system in China, and its influence on the economy is difficult to estimate.With the rapid development of the world financial market, traditional finance theory gradually being challenged because it cannot explain a lot of abnormal phenomenon taking place on the stock market. Facing with the complicated and unpredictable environment, people's behavior are not always in a rational state, their decisions are always subject to external trends. As a strong complement to traditional financial theory, the rise and development of behavioral finance theory opens a new way to the study of speculative bubbles. As one of the hot topics of behavioral finance, whether the herd behavior and positive feedback trading exist in China's stock market, if they really exist then what's the reason for its formation, how do they impact the operation of the stock market, and what should we do to prevent their bad effects. These studies have an important significance both in theory and in practice to the inhibition of excessive speculation, reduce the risks and maintain the normal operation of the stock market and economy in China.The basic structure of this paper, which research on herd behavior and positive feedback trading in China stock market, consists of six parts:The first part is the introduction. It describes the background and the significance of the research, gives a review to both the domestic and the international research in this field. Through the overall review and evaluation of relevant literature, it also expounds systematically the status of research on herd behavior and positive feedback trading in the stock market, all of which lays the foundation for the study. Finally is the basic research structure, the innovation and the inadequate of the paper.The second part is an overview of theory and models of herd behavior. This part firstly introduces the theory of herd behavior, defines the concept of herd behavior, analyzes the causes of herd behavior and explains its impact on the securities market. Secondly, this part describes four typical herd behavior models: LSV model, PCM model, CH model and CCK model, this lays a foundation for the empirical study on herd behavior.The third part is an overview of the theory and models of positive feedback trading. Firstly, it introduces the theory of positive feedback trading, discusses its formation mechanism and its impacts on the stock market. Secondly, it deduces a typical model of positive feedback trading (DSSW model) and the model solution.The fourth part is the empirical study of herd behavior in the stock market of China. This part selects the data from January 1,2006 to March 28,2011, uses Shanghai 180 Index and Shenzhen 100 Index for the study and bases on ARCH models for empirical analysis of herd behavior, the results showed that there is significant herd behavior in China's stock market, the herd behavior in Shanghai stock market is more significant than that in Shenzhen stock market, the herd behavior in the rising stage of share price is more significant than that in the falling stage.The fifth part is the empirical study of the positive feedback trading in the stock market of China. This part selects the data from January 1,2006 to March 28,2011, uses Shanghai Composite Index and Shenzhen Component Index for the study and bases on GARCH models for empirical analysis of positive feedback trading, the results showed that there is noise traders who use positive feedback trading strategy as their main trading strategy in both Shanghai and Shenzhen stock market. The existence of noise traders leads to a serious deviation of the prices in stock market from their fundamental value, and ultimately leads to an irrational stock market bubble.The sixth part is the conclusions and policy recommendations. This part analyzes the reasons of herd behavior and the existence of positive feedback trading, outlines the conclusions of this paper. Finally gives some specific policy recommendations on how to effectively prevent and control non-rational speculative bubbles.The main work of this paper is that it selected the data from 2006 to 2011, which covers the whole process of a new bubble in the stock market in China. Through the use of herd behavior and positive feedback trading models, this paper analyzes the internal transmission mechanism and mutual relevance between the herd behavior and the positive feedback trading. It analyzes the herding behavior from the risen and fallen stage respectively, and on the basis of this study it gives the positive feedback trading effects. In the end, it gives the conclusion that China's stock market rose and fell in the stage of herd behavior is different, and there is noise traders who use positive feedback trading strategy as their main trading strategy in both Shanghai and Shenzhen stock market.