A Research On Identification Of Excessive Volatility In Chinese Stock Market

Excessive volatility in stock market results in investment risks and affects the market efficiency.Related study has indications for both investments and policy-making.As an emerging market, Chinese stock market still lags behind its developed counterparties intrading mechanism, information publication and the rationality of investors. Market anomalies occurfrequently and the market efficiency is not unanimously approved in academic community. Under thispeculiar circumstance of Chinese stock market, both value analysis and the technical analysis arevalued by investors, thus leading to two popular expectations of normal stock prices, namingly, theintrinsic value and the market norm. A comprehensive excessive volatility indentification system forChinese stock market is thus stablished, including both the excessive volatility indentificatoncompared with intrinsic value and with the market norm.In excessive volatility identification comparing with intrinsic values, theoretical dividend-priceratio series calculated from the dynamic Gordon model and the VAR model and are compared withthe real one, so as to reflect the relationship between intrinsic and real stock prices. Wald testssignificantly reject the null hypothesis that the theoretical serieses and the real one are equal, and theratio of the variance of the intrinsic value series to that of the real one is merely around2/3. Thus,compared with the intrinsic value, the Shanghai composite index exhibits excess volatility both on theprice level and on the price volatility.In excessive volatility identification comparing with the market norm, EGARCH(1,1)-M-t model isidentified to be the most fitted model for the Shanghai composite index. The numbers of over-volatilepoints compared with the price level and the price volatility as recognized by Value-at-Risk methodand box-plot method are173and297respectively.Based on a comparison and summary of the differences and similarities between the two empiricalstudies’ results, a risk warning of value deviation, trend deviation or high volatility is each givenaround each type of excessively volatile points. Government should remind investors of these risksaccording to the excessive volatilitity indentification results, and take methods of persuasion orguidance to insure the allocation efficiency of funds in stock market.