Investor Confidence And Security Market Performance

In early 2008, China stock market entered a period of adjustment after two years'sharp rising because of subprime mortgage crisis. The stock market of Shanghai and Shenzhen had price fluctuation sharply. The Shanghai Index fell from 6,100 points to 1,600 points. Most of investors lost lots of money. Investor confidence frustrated seriously. We know that there is a "chase Shade" phenomenon in the stock market. Investors buy into stock market actively when the stock is rising. If investors have pessimistic market expectations, the share price will decline seriously. This shows that the behavior of investors is not rational completely. Based on their cognitive biases and market environment, investors make their decisions. From the subprime crisis to the present, investors'lack of confidence caused the downturn of the stock market. Therefore, the research about investor confidence and the performance of security market is very meaningful. Based on the research, the author gives some suggestions to improve investor confidence. These suggestions can promote a healthy and stable development of security market.This paper introduces the characteristics and influence of investor confidence, analyzes the influence factors to investor confidence, reviews the measure of investor confidence. Based on these, the author selects seven variables to describe investor confidence. They are volume, turnover rate, price-earnings ratio, broad money supply, new loans, fund- raising of IPO and the number of IPO companies. Using catastrophe theory, the author constructs investor composite confidence index.In the empirical research, the author first analyzes the relationship between composite confidence index and Shanghai-A-share index. Using GRACH model, the author then analyzes the relationship between the volatility of investor confidence and Shanghai-A-share earnings. The empirical results show that investor composite confidence index preferably reflects the Shanghai-A-share index trend in overall. Only in the short term its'volatility was more intense than Shanghai-A-share index's. In addition, the increase of investor confidence has a positive effect on market earnings, and the volatility of investor confidence has an overflow effect on market earnings.Finally, the author points out that we should improve investor confidence and gives some recommendations to protect investor confidence based on the empirical results. First, government and regulatory authorities should give priority to improve investor confidence. Second, investors should establish confidence themselves. They should see long-term investment value of stock market of China. They should make investment rationally. Third, our country should issue investor confidence index rapidly so that we can ensure the healthy development of stock market.