Research On The Preference Switching Of Chinese A-share Market

The Chinese stock market suffers a lot since the establishment,such as bull market and bear market appeared alternately,the economic crisis in Southeast Asia,the US subprime mortgage crisis,the European debt crisis,and the abnormal fluctuations in the Chinese stock market in 2015.With experience of those incidents,Chinese economic and financial system tends to be improved continuously,and both the regulators and the participants have made efforts to cultivate market liquidity.Moreover,the style of the market has been changed following the hot spot of economic development and the reforms in China.With a series of reform practices,the A stock market of China has gradually matured,and the focus has been gradually transformed from the obsession of speculation to value investment.Liquidity has always attracted much attention in the economic and financial field,as each crisis is accompanied by depletion of market liquidity,which made it an interested topic among the scholars.Under the above background and based on the perspective of market liquidity,the current article will investigate the different investment portfolios in the A stock market in the overall status and individual status of the Chinese A stock market,to explore the preferences of market asset allocation under the changing market liquidity.The current article are carried out with the following steps: Firstly,we review the literatures from domestic and foreign to explore the impact of market liquidity on asset prices,the investment style of the stock market and the application of Markov State Transfer Method in economic and financial fields.Secondly,we investigate the preference of the market investors for different stock portfolios in the face of liquidity changes in China's A-share market,and the two different states of market are further studied.Finally,we discuss the economic reasons behind the different states of the market,and further verify the changes in market preferences.In terms of the research methods,the current article adopts the illiquidity index(ILLIQ)to measure the liquidity of the market,and further use the AR(5)model in time series regression to calculate market illiquidity changes through residuals.For the preference of the market,the Markov State Transfer Method is applied to study the impact of stock market liquidity shocks on the returns of China's A-share market portfolio from 2006 to 2016.In one state,the illiquidity of the stock market makes no impact on the stock price of the market.However,in another state,the illiquidity impact of the stock market has a significant impact on the market: low BM stock portfolio,high Circulated stock value portfolio,the SSE 50 Index portfolio performed better than high BM stock portfolio,low Circulated stock value portfolio,CSI 500 index portfolio.That is,market illiquidity shocks have a positive effect on high liquidity portfolios and negative impact on low liquidity portfolios.Further,the current article find that the state probability resulted from the Markov State Transfer Method is related to macroeconomic variables and stock market indicators,and we call this state an abnormal situation or a period of market depression.All these results are obtained by controlling other system risks in the market,such as default risk and maturity risk.The following conclusions are drawn: First,the responses of different asset portfolios in the market to liquidity shocks are different,that is,portfolios such as low BM stock portfolio,high Circulated stock value portfolio,the SSE 50 Index portfolio and corresponding high risk portfolios make different responses to the changes in market liquidity.Second,the market prefers liquid assets,and there is a phenomenon of “flight to liquidity” in the market.Third,there are significant relationships among the probability of state 2 in the market,the macroeconomic variables and the market variables.The state 2 is considered as the state of market crisis,and the market liquidity shocks have a greater impact on the market under this state.The current article uses the impact of illiquidity shocks on asset prices in different states to illustrate the phenomenon of flight to liquidity in the market,and is reflected by the change of market investors' style to a certain degree.In terms of policy,market regulators must continue to pay more attention to cultivate the market liquidity.Overall,there are two gaps in the existing literature.One gap is that the impact of liquidity risk on asset prices in the domestic research is limited to the traditional pricing model.The other gap is that although the Markov State Transfer Model has been introduced into China for many years,it is mainly focused on the aspect of volatility and asset allocation,and there exists almost no researches on the application of the Markov State Transfer Model to market liquidity.This article has made useful efforts to cover the two gaps to some extent.