Research On Chinese Industry Price Volatility Based On Multi-fractal Theory

Currently, the study on market volatility has become a hot topic in academia at home and abroad. As is known to all, as an emerging stock market, Chinese stock market volatility is time-varying. Industry price volatility is always closely related to stock market behavior. However, complex properties of price fluctuations in actual financial market are hard to be well described based on the traditional financial theory. From the perspective of nonlinear, the birth of the multi-fractal theory opens up new horizons for the research on the financial market. From the view of complexity science, the paper investigates Chinese industry price volatility based on the multi-fractal theory. Main contributions and innovative achievements are as follows.(1) The chapter is thorough quantitative analysis of characteristics of the evolution of investment term structure based on information entropy, which reveals the effects of the evolution of investment term structure on price fluctuations and market stability and effectively verify the Fractal Market Hypothesis. The result indicates that when the market is composed of the investors on different investment horizon, the degree of information entropy and balance is high, the consistency of investment term structure is bad, price fluctuation is smooth and market stability is strong. However, when the investment horizon of investors tends to be no difference, the degree of information entropy and balance becomes low, price fluctuation becomes dramatic and market stability becomes weak.(2) Using October17,2007as a turning point, the chapter investigates singularities of ten industries of Hu Shen300index before and after the financial crisis based on MF-DFA. The empirical results indicate that all the industry index exhibit multi-fractal properties before and after the crisis. Before the crisis, the spectral width of Telecom Services, Industry, Consumer Discretionary and Information is wider than others, which leads to more dramatic price volatility. After the crisis, the spectral width of Financials and Energy is wider than others, which leads to more dramatic price volatility. Moreover, the spectral width of Energy and Financials after the crisis is wider than before, which leads to more dramatic price fluctuation. However, the spectral width of other industries is narrowed, which leads to steadier price volatility. Finally, Industries like Energy, Industry, Consumer Discretionary, Information, Consumer Sector and Telecom Services are significantly affected by the financial crisis due to bigger change in the spectral width, while the influence on other industries is limited.(3) Using the daily return rates of Dow Jones and Hu Shen300index from April8,2005 to December31,2009, the chapter tests the long-term correlation between American stock market and Chinese industries. Moreover, the multi-fractal properties of their cross-correlation in different economic periods are analyzed based on MF-DXA and sliding window technique to reveal the influence of American stock market on Chinese industry price volatility. The result indicates that the cross-spectral width of Dow Jones and Telecom Services, Industry, Consumer Sector, Consumer Discretionary is wider than others before the crisis, which leads to strong multi-fractal properties and more complex cross-correlation, In the early phase of the crisis, the cross-spectral width of Dow Jones and Consumer Sector, Consumer Discretionary, Financials, Information is wider than others, which leads to strong multi-fractal properties and more complex cross-correlation. After the crisis, the cross-spectral width of Dow Jones and Financials, Pharmaceuticals, Consumer Sector and Energy is wider than others, which leads to strong multi-fractal properties and more complex cross-correlation. Furthermore, compared with the early phase of the crisis, the cross-spectral width of Dow Jones and most industry except Consumer Sector is wider than before and after the crisis. Therefore, Chinese industry price volatility is significantly affected by American stock market in these two periods.All the above conclusions are not only beneficial to investors to estimate the risk of different industries and to do rational investment decisions, but also beneficial to the development of enterprises. What’s more, they can help market regulators to regulate and control the market effectively. Thus, the healthy development of the stock market and the economy could be well promised.