An Empirical Study Of Factors Affecting The Stock Market Stability In China

The stock market in China has been established for more than20years. It has become an integral part of market economy and has made a great contribution to the development of economy. However, compared with foreign mature stock markets, Chinese stock market is more fluctuate. Especially since the reform of non-tradable shares in2005, the stock market’s volatility has seriously affected the stability of the stock market. In November2013, Xi Jinping pointed out in the18th Central Committee of the Communist Party of China (CPC)that we should complete financial market system, strengthen the financial infrastructure construction, ensure the safety of the financial markets and overall stability. So It can be seen that our party and the state is very concerned about financial market stability. Stock market as an important part of financial market, its stability is so important. So, what factors will affect the stability of the stock market? Both foreign and native Scholars have done a lot of studies. With different angles and methods they have got different conclusion. Essentially, the state of macro economy and macro economy policy determines the stock price, so studying stability of stock market from the macro economy perspective is particularly meaningful. With the development of behavioral finance, investor sentiment has also been the attention of scholars. There has been a lot of study on the measure of investor sentiment and its relationship with the stock markets, but studies considering the investor sentiment as one of the factor influencing the stock market are few. So it is important to consider the investor sentiment as one of the factor influencing the stock market when we study the stability of stock market.In this paper, the research focuses on Chinese stock market stability test and the analysis of its influencing factors. For purpose of research, method in this paper has combined theory with practice, qualitative analysis with quantitative research. By reviewing the related literature, we believe that the existing researches have following shortcomings:definition of the stock market stability is fuzzy, difficult to measure, influencing factors are not perfect. So first of all, based on the stock price determination mechanism, the actual situation in our country and considering the availability of data, we use economic growth, money supply, inflation rate, interest rate, exchange rate, other macroeconomic factors, and at the same time investor sentiment to build the system of influencing factors. And we use deductive reasoning method to analyze how those factors affect the stability of the stock market which can be a good theoretical basis for empirical research.Second, we focus on definition and test of Chinese stock market stability. We mirror3σ to give the definition of stock market stability. After comparison of different stock market volatility measure index, we choose the stock price index to measure the stock market volatility. Then, based on3σ principles, we divided fluctuation into three states:normal fluctuation, abnormal fluctuation and excessive fluctuation. We define normal fluctuation frequency as "critical frequency value" when the stock market is stable. In this article "critical frequency value" is set to86.64%. Finally, this paper use data of HS300index after the share reform to examine the stability of the stock market. Results show that in June2005to August2009, stock market was in a relatively unstable condition; in September2009to December2013in a relatively stable state.In general, in this paper we use both the description statistical analysis and econometric model method. First we use description statistical methods to analyze the relationship between various factors and stock market. Then, we use VAR model to test the stability of stock market with both unstable period data and stable period data, and we got the following conclusions:Firstly, through impulse response we can know regardless of time, economic growth and investor sentiment is positive to the stability of the stock market and interest rate is negative to it. By comparison, when stock market is in the period of instability, the impact of factors on the stability of the stock market is stronger and more continuous. Secondly, through the variance decomposition, factor’s contribution to stability of the stock market in unstable period is bigger than in the stable period.In both periods, inflation rate, interest rate and exchange rate have big contribution; Money supply has small contribution. Contribution of Investor sentiment in unstable period is bigger than the stable period; Contribution of economic growth in the unstable period is less than the period of stability. Thirdly, through variance decomposition to investor sentiment, factors’ contribution to investor sentiment in unstable period is bigger than the stable period. During unstable period, investors care more about economic growth, inflation rate and stock market volatility, less to interest rate and money supply. During the stable period, investors is more sensitive to the change of interest rates, exchange rates and inflation rate, but the reaction to the money supply is still very small.The mainly possible innovation of this paper are as follows:Firstly, based on the macro perspective, we consider investor sentiment as one of the factors which have a big influence on the stability of Chinese stock market.Secondly, based on the idea of probability and statistics, this paper use the idea of3σ principles to define and test stock market stability. Previous definition on the stability of the stock market is not operable, and traditional methods to examine stability are more complex. Definition based on3σ principles is simpler and more intuitive which provides a new perspective for further researchThirdly, through empirical study, we find that different factors have different impacts on stability of stock market in different periods which provides certain reference for policy making in China.Due to my limited ability and knowledge, this paper has the following disadvantages. First, the applicability of the test methods based on3sigma principle is poor, which need be further improved. Second, some limitations exist on the selected proxy variables. Third, a shorter sample interval may cause results have a certain bias.