The Influence Of Heterogeneous Beliefs Of Institutional Investors On Chinese Stock Returns And Volatility

The one of the key assumptions of standard financial theory is that market participants have homogeneous belief,which means that all investors have the same expectations of future earnings of risky assets. Contrary with the assumptions of beliefs’ homogeneity, heterogeneous beliefs refers to different investors have different expectations of the price of risky assets in the future, which is generally measured by the expected rate of return and variance on the held risky assets. Evidence from numerous studies and development of China’s securities market in the last decade have shown that the market does exist heterogeneous beliefs of investors and does have profound impact on the securities market and risk asset prices.In this paper, we construct a capital market equilibrium model based on the divident progress and heterogeneous beliefs by modifying the traditional noise traders model(DSSW model). Empirical part we selected short and medium HAODAN index as proxy for investor heterogeneous beliefs, while selecting the Shanghai Composite Index, the CSI 100 Index and the CSI 500 Index to characterize China’s stock market as a whole, the market share market and small-cap stocks markets, Respectively. After all, the GARCH-M(1,1) model shows that:(1) investor’s heterogeneous beliefs have a positive impact on stock index returns and all kind of index are more sensitive to the changes of short-term investors faith;(2) an increase in the degree of investor heterogeneous beliefs significantly enlarge fluctuations in the the stock market, and the market got the risk compensation. But in the other hand,the impact of the former on the volatility of the market overall as well as the small-cap stocks market is not very significant;(3) heterogeneous beliefs have different degrees impact on different sizes and types of the stock index, among which small-cap stocks is the most sensitive one. Therefore, regulators should adopt flexible policies to regulate the market, gradually promoting the standardization of information disclosure, the rationalization of the market and investor behavior.