The Study Of Stock Price Fragility

This paper mainly discusses the relationship between the ownership structure ofstocks and non-fundamental risk. In traditional asset pricing theory, the composition ofownership of a stock does not influence future returns or risk. However, relative empiricalliteratures in finance finds that investor demand unrelated to fundamentals (i.e. herdingbehavior) will lead liquidity shocks to stocks, and thus can have large effects on stockprices. Therefore the composition of ownership of a stock should be useful for forecastingnon-fundamental risk.In this paper, we use ownership structure and correlated funds flows to measure stockprice fragility, which is used to predict stock price volatility. We define an asset to befragile if it is susceptible to non-fundamental risk. Therefore, a stock can be fragilebecause of concentrated ownership, or because its owners face correlated or volatile flowsstocks when ownership is diversified. Overall, fragility depends on ownershipconcentration and the volatilities and correlations of owners’ expected liquidity trades.Based on the definition of fragility above, the paper applies the idea to non-monetaryopen funds of China between2004and2010, empirically uses stock shares held by fundsand the correlation of funds net flows to measure stock price fragility, and thus predictsstock price volatility. Finally, the paper extends the logic of fragility to a multi-stockcontext, and uses co-fragility to forecast stock return comovement.Through empirical study, we find that fragility strongly predicts price volatility.Ownership structure, the correlation of funds net flows, market capitalization and stockmarket book ratio have impact on excepted volatility of stock price. Meanwhile,co-fragility is also statistically significant to stock return comovement.