Research On Price Discovery Function In China’s Stock Market Based On Mean Reversion Theory

Price discovery is a basic function of the stock market. It determines whether theoptimal allocation of resources and reflect function is effective, and also marks thedegree of the stock market maturity. Price discovery is defined as a dynamic processto make an equilibrium price in the market by certain quantity and quality of thegoods at a time, due to the interaction of supply and demand. In a market, newinformation will be randomly reflected on asset prices through supply and demandand trading behavior. The process realizes the price discovery. A deal of buyers andsellers participate in a competitive market transparency at the same time for freedom.That is to say, the price discovery is the process of finding an equilibrium price.When price is deviated from the intrinsic value of the stock, the market will beadjusted by itself to realize the price discovery function, to make the price of thestock return to its intrinsic value. Average price itself is the intrinsic value of thesecurity and it reflects the admission of a security price within the market for a certainlength of time. So we can prove whether there is price discovery in the stock marketfunction by checking whether stocks have mean reversion character. If the stock pricereturns to its intrinsic value in the long run, it proves that the stock market has thefunction of price discovery. However, if stock price is deviated from its intrinsic valuefor a long time, it proves that the stock market does not have price discovery function.In this paper, we use the mean reversion theory and nonlinear model to study that whether there is price discovery function in China’s securities market. We take the csi300index, the composite index of Shanghai, and composite index of Shenzhen, thegrowth enterprise index and the small and medium-sized plate index asrepresentatives, and use nonlinear model of smooth transition regression model(STAR) to do mean reversion empirical research respectively, so as to determinewhether China’s stock market has price discovery function. The results show that thecsi300index, the composite index of Shanghai and composite index of Shenzhen, thegrowth enterprise index and the small and medium-sized plate index miss thecharacteristic of the mean reversion in the range of samples. So the conclusion goesto that the stock market of China does not have price discovery function. It means thatChina’s securities market is still not perfect, and we need reform to improve marketmaturity.