The Influence of Behavioral Finance on Capital Market in China - Take the Asymmetrical Stock Market Fluctuation as an Example

Abstract

The volatility of stock returns is affected by macro variables, economic policies, company fundamentals and investor sentiment. This paper studies the effect of behavioral finance on the asymmetry of stock market volatility, and selects the CSI 300 daily return rate from January 4, 2008 to December 31, 2016 as the research observations, using the EGARCH model that introduces the loss aversion function to model.The CSI 300 index daily returns volatility model is empirically tested. Empirical findings: (1) Loss of aversion and overreaction can explain the asymmetry (leverage) of volatility in China's stock market, that is, the fluctuation caused by the same amount of “bad” is greater than the fluctuation caused by the same “good” news. (2) The revised model more closely describes the asymmetry of China's stock market volatility and reflects the impact of asymmetric volatility on stock market risk control, pricing, and asset allocation. Finally, the article proposes to adopt a reversal strategy to reduce the bias caused by some human factors by quantifying transactions.