The Research Of Sector Rotation On Chinese Stock Market

With the development of Chinese stock market, listed companies have involved almost all sectors of national economy, leading to investors paying more attention to sector rotation. Knowing the rules of sector rotation, investors can identify and grasp market hot spots in time, thus obtain additional income. At the same time, investors can avoid risks of individual stocks caused by the industry sector decline. It also contributes to understanding the relationship between stock market and the real economy, providing support for Security Regulatory authorities to monitor the stock market.This paper studies the mechanism of sector rotation using the theory of economic cycle, industry association and behavioral finance. The study suggests that industry characteristics, the association of industries and the lack of arbitrage mechanism are foundations in sector rotation of Chinese stock market; the economic cycle and behaviors of investors, especially irrational behaviors of noise investors, are the driving factors in sector rotation of Chinese stock market. We select weekly data of CSRC sector weighted average price of circulating share capital from January 7th, 2005 to June 12 th, 2015, and divide the period into 5 stages. We use Lead-lag relationship and VAR Model to analyze the sector rotation of Chinese stock market. The study finds that sector rotation varies widely at each stage in Chinese stock market. In the first and fifth stages, the sector rotation phenomenon is obvious. In these two stages, the efforts of Government and Regulatory authorities on the stock market are significantly stronger than in the other stages; the sector rotation of Chinese stock market is significantly affected by the policy. In the second and third stages, as rational investors and speculators have reduced stock investment due to stock market bubble, noise investors have left the stock market, and sector yields have fallen at the same time, the sector rotation phenomenon weekens. In the stable period, as speculators have no way to induce the noise investors, the sector rotation phenomenon continues to be weak. In the fourth stage, there is enough capital to invest in most industries due to extensive use of leverage. Thus, sector yields change at the same time, weakening the sector rotation phenomenon. VAR analysis shows that the change of Shanghai A-share Index for sector is significant and influences significantly in the first to third stage. In the fourth stage, the significant influence still exists, but the influence on defensive sector is weaker than on other sectors. The significant affection shows that the use of sector rotation strategy needs to take into account the economic cycle or the stock market stages; it has also proved that the economic cycle is the driving factor of sector rotation in Chinese stock market. Through the analysis of impulse response, we find that the response time is different in different stages. We can use the impulse response time to consider the shareholding time when using sector rotation strategy.