China's Securities Market Policy Game

As the Government exerts great influence on the performance of the stock market, policy-dependency is the most outstanding characteristics of Chinese stock market. Lack of regulatory independence and proprietary protection, as well as multi-orientation of the Government, accounts for that. In order to meet its own target, the Government controls the supply and demand of the market and changes the transaction rules. As a result, the function of the stock market, such as allocation of the resources and supervision of the corporate management, is jeopardized and market risk increases.The analysis of the policy game in the stock market aims to explain the optimal strategy the Government would adopt to maximize its utility, and the resulting equilibrium, so as to evaluate policy-dependent stock market for the Government.The model first discusses the equilibrium in policy game with complete information when investors possess complete information on the Government's utility. Under such circumstance, the Government faces negative utility. Therefore, the Government has to make effective commitment to restrict its own strategy choice so as to get away from the dilemma.For policy game with incomplete information, influencing stock market could be the optimal strategy for the Government, as investors could not accurately predict the Government's utility function. Whilst in multiple-run game, the timing of government influence would, not only depend on the market's estimation on possibility of government type but also the discount factor of government's future utility. When the discount factor is sufficient, in other words when the government is not too short-sighted, influencing the stock market does not always brings maximum utility for government.As concerning the issue of liquidation of state-owned share, the game model between government and investors helps to elaborate the relevance between government's optimal liquidation solution and the sensitivity of market to this issue. Thus increasing the transparency of state-owned share liquidation issue so that to reducing the market's sensitivity would be good for resolution of this issue.Behavioral effect, which has significant influence on investors, is introduced into this game model to improve the effectiveness of the result of game analysis. Also, the instability of risk tolerance and the difference between "value function" and "utility function" from prospect theory and the over-reaction effect are taken to make theanalysis more sensible. Meanwhile our analysis result does demonstrate that introduction of the above-said behavioral effects plays an important role in government's choice and the resulting equilibrium.In a word, the stock market policy game analysis tries to illustrate that influencing the market might not be a wise choice for government's utility maximization. A better choice would be positioning the goverment in the role of market regulator. When the government correctly positions itself in the stock market, it should also make structural adjustments accordingly so that the market can shape a stable prediction of government's behavior and therefore result in a win-win situation.