Effect of Retail Investor Attention on Chinas A-Share Market Under a Strengthening Financial Regulatory Policy

Abstract

The influence of retail investor attention on the stock market has been examined widely in recent years. Prior studies confirm that retail investor attention has a significant effect on stock price or liquidity, and that the former can predict the latter. However, whether the stability of this correlation is affected by the change of external factors has not been studied in depth. Given that China’s stock market has distinct policy-oriented characteristics, the gradual strengthening of regulatory policies is likely to affect retail investors and thus affect the stock market. Therefore, based on the progressive reinforcement of financial regulatory policy, this paper first classifies retail investor attention and then examines the effect of such attention on the Shanghai Stock Exchange (SSE) 50 Index and the China Securities Index (CSI) 1000 Index. We also investigate the unusual closing price trends of the two major indices that emerged at the end of 2016. We find that using retail investor attention to explain the fluctuations in the variances of the indexes is more effective for the CSI 1000 Index than the SSE 50 Index. The influence of the various categories of retail investor attention on the two indexes changes significantly before and after the implementation of a strict regulatory policy. Specifically, attention paid to regulatory policies, Internet financial products that focus on currency funds, and the macro situation have markedly different effects on the stock market quotation. During the implementation of a stringent regulatory policy, retail investor attention can explain the fluctuation in the variance of 70% of the contrary trends of the closing prices on the two indexes.