Research About The Regime Characteristics Of China’s Stock Market’s Returns And Volatility

Since the establishment of Chinese stock market, it continues to go stronger through the24yearsof ups and downs, and has made great contributions to the development of Chinese economicconstruction. Now, the stock market has become the basis and main body of Chinese financial market,an important constituent part of a complete market system. But at the same time, the stock marketshows up some problems that can’t be ignored. For example, excessive speculation, severe volatility,market segmentation etc. On the background of the rapid development of the economy, these problemsseriously hinder the normal development of the Chinese stock market, and are not conducive to thefurther opening up and internationalization of the Chinese capital market, and may even be harmful tothe structure transformation and sustainable development of the whole economy. Therefore, how tounderstand the characteristics of the Chinese stock market’s returns and volatility deeply, and how tofurther standardize and improve according to the potential risk the stock market, is an important topicthat we need to think in the current situation.In the study of the stock market’s returns and volatility, the theory and practice circle holds aconsensus: it has the structural change in the volatility of the stock market return series, sometimesdramatic, sometimes stable. Hidden Markov regime switching model is sensitive to capture the point ofstructural change. Combing with the corresponding events, the model could locate the fuse of structuralchange accurately. Specifically, the model contains two processes. One is the stock market return seriesthat can be directly observed, and the other one is a Markov process that can’t be observed. Thevolatility of the stock market return series is controlled by the hidden Markov chain. In this paper,Markov process is divided into high, medium and low three regimes according to the size of thevolatility, and each transfers to the other by a certain probability. Moreover, the model does not need tomake any assumptions to the variance of the error in the different regimes. It can be estimated with theother parameters at the same time, which can fully reflect the structural change in the volatility processof the series.Based on the subject of “Research of regime characteristics of Chinese stock market returns andvolatility”, this paper conducts empirical research on the returns and volatility of representative indexes of different markets in China (Shanghai, Shenzhen, Hong Kong) and different plates of the same market(Shanghai A shares, Shanghai B shares). The results show that: the mainland stock market (Shanghai,Shenzhen) is quite different from Hong Kong stock market in return, volatility and regime switchingbehavior. It may be caused by differences in the degree of development and maturity of the stock market,market operating environment, shareholding structure, investors structure, regulatory system etc. At thesame time, the empirical results also show that despite the Shanghai A share index and B share indexhave the same macro-economy, market operating environment, the trading system, but the two showsignificant differences in the range of volatility, the duration, the switching frequency, reflecting theserious phenomena of market segmentation.Combined the structural change point from the empirical results with major events around the timepoint, it can be found that the government policies have a strong influence on mainland stock market.The main reason that leads to the structural change of the stock market, lies in the introduction of thegovernment policies and the outbreak of market events. Obviously, Chinese stock market has not shakenoff the "policy market" situation."Policy market" could avoid the risk of the stock market’s fluctuationsby controlling the external adverse effects. But the actions of the government will inevitably disturb theexpected development of the stock market. The result is that the stock market is not only impact ofmarket changes, increasing the uncertainty of the stock market.To stabilize the abnormal fluctuation of stock prices and reduce the frequent switching of the returnseries between different regimes, this paper summarizes the existing problems of the mainland stockmarket and B share market, and puts forward related suggestions. For example, establish a unified anddiversified market system, improve the quality of the listing Corporation, strengthen the legalconstruction vigorously, optimization of the mainland stock market investors structure, a reasonablebalance of stock market supply demand relations, a clear position of B share market as soon as possibleetc. The conclusions and policy suggestions of this paper aim at providing a certain direction for riskcontrol, system reform of the stock market, volatility forecast.