Research On Bubbles In China Stock Markets

Stock market bubbles are momentous financial events that are fascinating to academics and practitioners alike. As long-term and continuous-argument topics, they have presented a perennial challenge to our understanding of financial markets. Historical experiences teach us the continuously inflating stock market bubbles could have disastrous consequences for the whole economy system. So systematically researching into the stock market bubbles theory has great significance and practical values to the healthy development of the stock market and the economy. Rooted in Chinese reality, this thesis makes a thorough investigation into the speculative bubbles'beginning, development and outbreak phases as well as its influence on the economy. The clue of this thesis is as follows: phenomenon→empirical tests→theoretical explanation→prediction→aftermath.Starting with the bubbles'definition, the dissertation looks back in detail the important stock market bubble affairs in history and the development of China stock market. We also briefly review the related literature. All of those provide necessary background knowledge for our following research work.Based on traditional rational bubbles theory, we introduce regime switching models of periodically collapsing speculative bubbles. Then a modified two regime-switching models of speculative behavior is proposed by including last six months'bubble returns as an indicator of the probable time of the bubble collapse. Empirical results show that the deviation of actual prices from fundamental values and cumulative bubble returns are significant predictors and classifiers of returns of Shanghai and Shenzhen A-share market.We then integrate rational and irrational speculative bubbles theories, propose a new speculative bubbles model based on arbitragers'hybrid-rational. The model not only embodies irrational characteristics of positive feedback traders, but also reflects the stage feature of arbitragers'hybrid-rational. So it is very close to the real market. On the one hand, when the stock price was undervalued, arbitragers will adopt rational investment strategy so that the price can reflect its fundamental value. On the other hand, in order to obtain larger capital gains, when the price was overvalued, arbitragers will use a positive feedback strategy and ride the bubbles as long as possible. According to the model, we can see that arbitragers'behaviors will help the bubbles continue to expand or burst suddenly. So in short term, arbitragers usually destabilize the stock markets instead of using their information for stabilizing purposes. This seems to fit well with the popular behaviors of Institutional Investors during the stock market bubbles.From Econophysics perspective, we describe in detail the stock market behavior before a crash. Meanwhile, using Capital Asset Pricing Model Integrating both Firm and Market (CAPMIFM), we decompose the asset return into two components. One is called the fundamental return, which is related to the intrinsic value of the asset. The other is called bubble return, which is derived from the asset bubbles. Then a stock bubble return model based on cumulative return is proposed. The model exhibits characterizing log-periodic oscillations and a power law acceleration of the cumulative return. Empirical results suggest that the model has a good fit for the bubbles of China stock market.Finally, we investigate the independent effect of stock price bubbles on corporate investment decision using both the aggregate data and firm-level data of China. Empirical results suggest that the consequence of stock price bubbles for investment behavior at the aggregate level is not consistent with the consequence at the firm level. From macro-economy perspective, stock market bubbles have no effect on investment decision. But from the analysis on the listed companies, we find significant evidence that stock market bubbles affect investment. Compared to aggregate investment, investment variations at the firm level caused by stock market bubbles are more harmful to effective allocation of capital. So for policy makers, the stock market bubble is not merely a sideshow, they must pay more attention to it. The primary innovations of the dissertation are summarized in the following:1. Propose a modified two regime-switching models of speculative behavior. Empirical results show that the new speculative behavior model has significant explanatory power for the next month's returns of Shanghai and Shenzhen A-share market.2. Integrate rational and irrational speculative bubbles theories, propose a new speculative bubbles model based on arbitragers'hybrid-rational. The model not only embodies irrational characteristics of positive feedback traders, but also reflects the stage feature of arbitragers'hybrid-rational. It is very close to the real market and fit well with the popular behaviors of Institutional Investors during the stock market bubbles.3. Build a stock bubble return model based on return decomposition and cumulative return. Empirical results suggest that the model has a good fit for the bubbles of China stock market.4. Investigate the independent effect of stock price bubbles on corporate investment decision using both the aggregate data and firm-level data of China. Empirical results suggest that the consequence of stock price bubbles for investment behavior at the aggregate level is not consistent with the consequence at the firm level. From macro-economy perspective, stock market bubbles have no effect on investment decision. But from the analysis on the listed companies, we find significant evidence that stock market bubbles affect investment.