The Research Of Volatilities In Chinese Stock Market Under The Background Of Financial Crisis

The US subprime mortgage crisis has spread and expanded constantly since2007.A local subprime mortgage crisis spread to bond market and evolved into systematicfinancial crisis. Then it spread across around the world from USA and evolved intoglobal financial crisis. Finally, it spread to the entity economy and evolved intoeconomic crisis. The overall situation in Chinese financial market is better than it indeveloped countries since the outbreak of financial crisis. However, nowdays, thelevel of global finance and economy improve constantly and the connection betweenvirtual economy and entity economy become more and more close, so the financialmarket in any country cannot keep their development in the environment of the globalfinancial crisis and recessional economy. China, as an important component part ofthe international political and economic system, and emerging economy whoseexternal dependence is close to70%, the indirect influence of the global financialcrisis to Chinese financial market is all-round and agelong.Under the background of global finance and economy, because of the impact ofuncertainty about the operation of global economy and the restriction of institutionaland historic factors in China, the benefits of many listed companies serious decline,then lead Chinese stock market to be in severe volatility and present a strong irrationaltrait. By September2009, in the Chinese macroeconomy, the signs of stabilisationappeared and positive factors accumulate constantly. Nevertheless, the basis of overalleconomic recovery is still vulnerable, and the future development of Chinese financialmarket is still facing many uncertainties.Author research the influences of financial crisis to investor sentiment,returns and volatility through the empirical analysis of Shanghai Composite Index.Therefore, author puts forward a view that the logarithmic change of trading volume is used as the method to measure the investor sentiment and introduces the investorsentiment as regressive factor into EGARCH model. Then author separate the returnseries of Shanghai Composite Index into three stages that are before, during and afterfinancial crisis, and respectively establishes adjusted EGARCH model for the returnseries in three stages. Through comparing the models in three stages, it can moreintuitively show the significant influence of financial crisis to investor sentiment,returns and volatility in Chinese stock market. Finally, author also respectivelyestablishes unadjusted EGARCH model for the return series in three stages, and thenwe can know which model is even better through the evaluation of the adjusted andunadjusted EGARCH model from predictive ability and describe risk ability.Baker, Malcolm＆Stein(2004) think market liquidity reflects the investorsentiment, and the change of trading volume is the most intuitive reflection of theliquidity in stock market. Therefore, author adopts the logarithmic change of tradingvolume to measure the investor sentiment. In this way, the data is objective, real,effective and have some good statistical characteristics, so it is more conducive toanalysis data for us. From the result of model evaluation, we find that the adjustedmodel is even better when introduce the investor sentiment as regressive factor intoEGARCH model in the special period during financial crisis. However, the unadjustedEGARCH model is better than the adjusted model at the stage before financial crisis.The different purpose of establishing model and the different economy backgroundswill cause different optimizing degree of models. In practice, we need to find the bestmodel which is to satisfy the contemporary needs but not to insist that the model is thebest in any conditions.From analyzing the volatility model, we found that, during financial crisis, themarket risk is the largest. At the same level of risks, returns reduce obviously to thelowest in this stage. And the influence of investor sentiment on returns is the mosttremendous in this stage. Moreover, beyond that, during financial crisis, manyinvestors lost, went bankrupt and were gun-shy. It directly led to rapid rise in thesensitivity of volatility to bad news and decline in the sensitivity of volatility to goodnews, the leverage effect of volatility significantly get worse.After financial crisis, on the one hand, through national macro-control and policyintervention, the impact of financial crisis eliminated gradually, the investors regaintheir confidence and no longer dump their shares urgently when they heard bad news.So the sensitivity of volatility to bad news decline rapidly. On the other hand, after thebaptism of financial crisis, the investors become more cautious and no longer invest blindly when they heard good news, it lead to the lowest sensitivity of volatility togood news in three stages, which means the investors tend to rational. Moreover,beyond that, after financial crisis, market risk significantly reduced, at the same levelof risks, returns have increased significantly. The coefficient of prior-period volatilityterm is more close to1, which means that the memory of stock market became morestrong. And the influence of investor sentiment on returns became smaller and last forshorter time. All of those things show that, after the baptism of the financial crisis,Chinese stock market became more mature, and the investors tend to be more rational.