Open-end Fund On The Chinese Stock Market Volatility And The Cyclical Impact Of The Empirical Research

The volatility of stock markets, proved by the empirical study of many internationaland domestic researchers, is already a matter of consensus. To measure stock marketvolatility, researchers have developed the method of ARCH modeling. When Chinabegan to introduce open-end fund in 2001, it was under the consideration that amarket dominated by individual investors would make the market unduly volatile, abad thing for the long-term stability of the stock market. In such context, thegovernment hoped to employ an appropriate and flexible framework, i.e., theintroduction of open-end fund, to realize such objectives as protecting investors,ensuring market integrity and reducing systematic risks. This was introduced as animportant policy for China's stock market. As a highly professionalized investmentmethod on a commission basis, open-end fund is bound to affect the stock marketprofoundly in such ways as changing the incremental money, product innovation andinvestment strategies in the market. Five years later, however, there is still littleempirical study about the impact of open-end fund on the stock market, especiallywhether it successfully stabilized the market by reducing market volatility, how itaffected the bull and bear phases of China's stock market, and to what extent itaccelerated the rising and falling trends in the market. This dissertation attempts to use the parametric method (such as ARCH models)and the non-parametric method of cycle estimation to conduct an empirical studyabout the impact of open-end fund on the Chinese stock market. Firstly, the paperuses GARCH(1,1) and EGARCH(1,1) models to conduct statistical analysis and datafitting of all workday data of Shanghai Composite Index and Shenzhen CompositeIndex. With the introduction of open-end fund as a dividing line, it compares thevariations of stock market volatility and evaluates whether the volatility structure ofthe stock market has changed. Secondly, the paper uses a non-parametric method(which may be called the method of cycle analysis) to analyze the cyclical structure ofbull and bear phases (such as the duration, the return amplitude, and the volatility ofbull and bear phases) after the introduction of open-end fund, comparing the changestherein to see whether the cyclical characteristics of the stock market have changed,thus evaluating whether the introduction of open-end fund has considerablyinfluenced the stock market. The paper also explores the ability of open-end fund toaccelerate the rising and falling market in the absence of short-selling mechanism,providing additional insight into the characteristics of China's stock market, especiallythe mental peculiarities of Chinese individual investors. The conclusions of this empirical study are as the following: Firstly, theintroduction of open-end fund has served to stabilize the Chinese stock market andreduce the volatility therein. There is a notable leverage effect in China's stock market,i.e., negative messages produce a bigger impact on stock market volatility thanpositive messages. However, the introduction of open-end fund somewhat reducedthis leverage effect, abated the stock market volatility to a certain extent, and helpedchange the irrational behavior of "chasing the rising prices while closing out on thefalling prices", thus stabilizing the stock market. This result is in accordance with theconclusion of many researchers.Secondly, the introduction of open-end fund shortened the bull phases of China'sstock market, lengthened the bear phases, reduced the return amplitude of bull andbear phases, whereas the volatilities of both bull and bear phases diminished. Inaddition, this research also shows that contrary to the qualitative studies of manydomestic researchers, open-end fund proves more powerful to accelerate the fallingrather than the rising trend of the stock market. This is probably because, on the onehand, China's stock market is not yet fully developed, the supervision structure ofpublic-listed companies is not sound, the disclosure of false information bypublic-listed companies made investors lose confidence and investing intent in thestock market, forming a pessimistic mentality. On the other hand, the government'sintent to drive and macro-control the stock market has a strong effect on the behaviorof investors. As a result of the unpredictability of governmental policy, individualinvestors developed a "policy-dependent deviation", either over-reliant orover-panicking. The frequency of trade mainly varies with the formulation and changeof policies. The attitude of investors toward the stock market becomes dominantlynegative. Therefore, from the perspective of policy-makers, fully developinginstitutional investors should remain the future direction.