Government Direct Intervention And Systematic Tail Risk

The Chinese A-stock market experiences a sudden and drastic crash from MidJune 2015 to January 2016.The Chinese government formed a so-called “national team” to directly purchase stocks of more than 1,000 firms to stabilize the market and restore investor confidence.“National team” mainly consists of China Securities Finance Corporation Limited(CSF)and China Central Huijin Investment Limited(CCH),and receives much attention from various fields.Until now,little researches focus on whether and how “national team” stabilize the stock market.These questions are greatly meaningful to building a long-term system to stabilize financial market of our country and remain to be further discussed.Using the Chinese stock market data from the third quarter of 2015 to the fourth quarter of 2016,this paper investigates how the Chinese government's intervention via direct stock trading has affected stock price systematic tail risk,selecting “national team” as research object,using SJC Copula function calculating the conditional probability of stock-price drastic increase or decrease on great increase or decrease of market-price to measure the systematic tail risk.This paper also investigates the channel how “national team” affect stock price systematic tail risk.Besides these,this paper give some insight on the adverse impact the “national team” may have on stock market and help deepen the understanding of market impact of “national team”.The empirical results of this paper find:(1)the national team plays an effective role of reducing systematic tail risk,and has the function of stabilizing the stock market during the crash period;(2)the national team's impact on stock price systematic tail risk is asymmetric,as the government shareholdings have a stronger effect on systematic left-tail risk than on systematic right-tail risk;(3)the national team decreases systematic tail risk mainly through providing extra liquidity and restoring investors' confidence;(4)the national team exerts an adverse impact on market quality by decreasing pricing efficiency and increasing transaction costs;(5)the exitance of national team does not increase the systematic tail risk or destabilize the stock price.Our findings are robust to a series of alternative empirical designs such as propensity score matching,and two-stage least-square regressions to ease possible endogeneity concerns.Out study enriches the literature on financial crisis,government intervention,and mechanism of market stabilization,and also provides empirical evidence for policy making to enhance the long-term stability of the financial system.