Research On Investment Preference In Chinese Stock Market

Behavioral finance which draws on the research findings of psychology, sociology and other studies and systematically studies irrational investors’investment decision behavior has become a hot topic in the field of international finance in recent years. The empirical research of gambling preferences is rarely applied to stock market in domestic. The thesis which based on the study of behavioral finance and takes stock market investors’gambling preferences as objects of study, makes an exploration into the abnormal financial phenomena related to gambling behavior in Chinese stock market.Firstly, portfolio-level analyses and firm-level cross-sectional regressions verify the existence of’the Idiosyncratic volatility puzzle" and "the MAX effect" in Chinese stock market. The empirical results show that the range of price and characteristics of skewness can explain the negative and significant relationship between idiosyncratic volatility and nature return in a certain extent. And the range of price and turnover rate can explain the MAX effect in a certain extent. Idiosyncratic volatility and idiosyncratic skewness are not the reasons that cause the negative relation between the maximum daily return over the past one month and expected stock returns, i.e., "the MAX effect." However, maximum return explains the idiosyncratic volatility puzzle partially. The existence of’the Idiosyncratic volatility puzzle" and "the MAX effect" to some extent reflects investors’preference for stocks with lottery-like payoffs. The irrational investors’excessive prefer to the lottery-like stocks result in negative return.Secondly, based on the study of two financial anomaly related to gambling behavior, the thesis propose the index to recognition the lottery-type stocks, lottery-type stocks are defined as stocks with low price, high maximum daily return over the past month and high idiosyncratic volatility of returns. Lottery-type stocks, nonlottery-type stocks and other stocks are distinguished and compared to further investigate the gambling behavior in Chinese stock market. The empirical results show that the returns of lottery-type stock were significantly lower than the returns of nonlottery-type stocks and other stocks, and investor sentiment and the macroeconomic environment will affect investors’gambling behavior. When investor sentiment is high, investors’gambling behavior is more obvious. When the macro-economic is in downturn and investors lack of confidence in future economic, investors’demand for lottery-type stocks will rise.Overall, the thesis investigate some irrational investment behavior to verify the investors’gambling preference in Chinese stock market, which will help investors recognize their irrational behavior, and correct or reduce their own irrational behavior to improve their investment strategy.