Margin Trading,Investor Sentiment And Stocking Market Volatility

In 2015,China's stock market experienced huge changes from a prosperity to and depression.Shanghai Securities Composite(SSC)index rising from around 2000 points to 5178 points,brought about an investment boom.Afterwards,the SCE index fell rapidly from 5178 points to 2638 points.Because the big index movement was accompanied with the existence of a huge amount of financing,it led to the leveraged investors suffered great losses.The volatility of the stock market also made the general investors and researchers blamed the crash to be the high lever mechanism of margin trading.During the sudden and sharp rise and drop,investor sentiment also changed from being extremely high to pessimistic.The traditional financial theory was challenged.The hypothesis of "the market being effective" and "rational economic man" in reality were questioned by both theory and practice.From the perspective of behavioral finance,investors in the stock market are affected by various factors including politics,economic,psychology,etc.,which may function in several ways.Under this situation,we have to consider the relationships among investor sentiment,margin trading and stock market volatility.The study of the issue,is not only beneficial to reduce irrational investment,but also available to make margin trading system,in the development of China's stock market,more standardized,and further promotes stock market to develop steadily and healthily,as well as plays an active and indispensable role in economic development.First of all,constructing investor sentiment indicator variable is the basis and premise of relevant research.Based on the reference and summarization for proxy variables that were frequently used by previous researchers,the author applies Principal Component Analysis(PCA)and Partial Least Squares(PLS)method to construct theoretical and empirical analysis based investor sentiment index variables.When constructing the investor sentiment index by PLS method,the author adopts R language to carry out complicated operation.Comparing the results get from the two index construction methods,the author finds that investor sentiment indicators based on PLS method fits with stock market volatility better,and the absolute value coefficient of indicator variable is of larger and stronger significance level.Secondly,this paper makes an empirical analysis by introducing the investor sentiment indicators into the model.By comparing two different ways of building indexes explaining the functions of market volatility and the influences from different market volatilities,the author discovers that based on PLS and PCA to build investor sentiment indicators have significant effects on overall market volatility.However,PCA based investor sentiment index has weaker effects than PLS based index on stock market volatility;therefore investor sentiment index based on PLS has better fitting effect.It is found that the investor sentiment index has a better inhibiting effect on the volatility of the larger market.Through empirical analysis,the interactive relationship between margin credit transaction and investor sentiment can also be detected.When investor sentiment is in a high state,rational investors will decrease th e purchase of leveraged buyouts,which can reduce the demand for stocks.At the same time,the decline of its balance will,in return,affect investor sentiment.When investors are in low investment motivation,the demand might be increased.Margin trading variables and investor sentiment indicator variables have a significant impacts on the volatility of stock market,and the high and low investor sentiment will affect the supply and demand of stock market.Credit trading makes two-way trading possible,and accumulating emotions can be released as well.Finally,the paper conducts VAR dynamic analysis for stock market fluctuation with the margin trading and the investor sentiment,which is corresponding to the regression analysis.According to the analysis of impulse response and variance decomposition,the above variables have impacts on the stock market volatility,and the conclusion of the test is very similar to the conclusion of regression analysis.In addition,the explanatory power of the financing transaction variables to the market fluctuation is much stronger than the lending transaction variable,and the length of the delay period is longer than that of the latter.In conclusion,financing transaction and securities lending transaction tend to have bigger negative impact on investor sentiment index variable.In the presence of financing transaction variable,investor sentiment index variables have obvious negative impacts on market volatility.According to the research and analysis of different market volatility,it is shown that investor sentiment index variables have the largest impacts on the volatility of SSC index,and the impact on the Shenzhen Securities Composite index volatility is much smaller.The author proposes to strengthen market supervision,enhance the transparency of information and ensure the smooth flow of market information.Moreover,it is necessary to accelerate the refinancing business and gradually improve the listing system,so as to promote the balance between supply and demand in the market and develop the Shanghai and Shenzhen securities markets in a balanced way.