Following Baker et al. (2014), Figure 3.1 shows the four steps included in the empirical method used to explore the relationship between government policies and stock market volatility. The first step is to set a threshold of daily movements in the SHCI, and the second is to search all dates with big movements of the SHCI that satisfy the set threshold between 2001 and 2016. According to the selected trading days, the next-day CSJ news comments relating to the daily performance of the stock market are collected to extract the reasons for big jumps of the SHCI. Finally, all explanations, which are believed to account for the big movements of the SHCI, are collated in terms of different kinds of government policies. Despite that the explanations in newspaper column articles are able to provide some useful information to identify the effects of government policies on the stock market volatility in China, there are still some concerns related to the method used in this present study, and required further investigation before conducting the next step.
Figure 3.1 Steps in the Empirical Method
Source: Author‘s summaries based on the literature.
First, the performance of the SZCI (Shenzhen Component Index) is similar to the SHCI; they have nearly the same time trend as well as variability range on most trading days from 2001 to 2016. Thus, only the SHCI is used to demonstrate the effects of government policies on stock market volatility. Second, in China‘s stock market, a daily change of 3% or more in the index is regarded as a big movement; not only investors but also stock commentators are highly
1. Set the
threshhold of daily movements of the SHCI in the stock market.
2. Search for trading days with big movements of the SHCI in terms of the defined threshhold. 3. Read news comments in next- day newspaper of the CSJ. 4. Collate the explanations for big movements of the SHCI.
available in financial newspaper columns that are written by staff correspondents and professional analysts to explain the causes of the big stock index movements.
Table 3.6 A Description of the Different Kinds of Government Policy
Policy Category Description
Monetary Policy
1. Adjustments to the deposit-reserve ratio 2. Adjustments in interest rate
3. Changes in the discount rate of the central bank 4. Liquidity injections by open market operation
5. Official announcements about the government‘s stance on future monetary policy
6. Market rumours about changes in monetary policy34
7. Other extraordinary actions taken by the monetary authority
Fiscal Policy
1. News reports or concerns about the growth of fiscal revenue and expenditure
2. Unusual government spending and its consequences
3. Changes or potential changes in taxes or the taxation system 4. Liquidity injections by the Ministry of Finance
5. Official announcements about the government‘s stance on future fiscal policy
6. Market rumours about the changes in fiscal policy
7. Other extraordinary actions taken by the Ministry of Finance
Regulatory Policy
1. Release of new securities regulations or laws 2. Reformation of regulatory rules
3. Regulatory activities of CSRC
4. Official comments about stock market regulations 5. Market rumours about the changes in regulatory policy 6. Regulator‘s market intervention under special circumstances 7. Changes in shares transaction tax35
8. Other reports, concerns and comments on regulatory policy
Other Economic Policy or Policy Expectations
1. News, reports and comments on newly released economic data or economic growth in future
2. New national strategies for economic development 3. Policy measures related to housing price control
4. Release of specific industrial policy or regional economic policy
5. Market expectation for changes in economic policy
6. Other events related to economic policy
Source: Author‘s summaries based on the literature.
An index change of 5% or more is regarded as a remarkably abnormal movement that is always believed to be caused by some important policy event, such as changes in the stock transaction tax, important speeches of CSRC‘s president, and central government
34 According to results reported in previous studies such as Bommel (2003), Zhao et al. (2010) and Zivney (1996), market
rumours have a significant impact on the volatility of stock markets. It is not uncommon to see that market rumours about changes in government policy account for a considerable amount of big movements of the stock market index in China (Zhao et al, 2010).
35 Share transaction tax is categorized as regulatory policy rather than fiscal policy because it intentionally aims at adjusting
announcements on the future development of the capital market. Thus, for this study, daily changes of 3% and 5% in the SHCI are chosen as the thresholds for selecting the trading days with abnormal stock market movements.
Third, the causes of every big movement of the stock index are identified based on explanations in at least three articles written by different classes of author such as staff correspondents, professional analysts and securities researchers. The explanations are confirmed and recorded as the major causes of the stock index movements if at least two of the three explanations are consistent and confidently reported as the trigger of market jumps. In some cases, there are no corresponding next-day reports available in the China Securities Journal for selected trading days. To solve this problem, three other major securities newspapers, Shanghai Securities News, Securities Daily and Securities Times, are chosen to collect explanations for the big stock index movements. A few extreme cases will be marked as ‗no specific reports‘ if no explanations are available from the four newspapers.
Fourth, all explanations for big stock index movements are classified in terms of different kinds of government policy (see Table 3.6). The explanations will be recorded as ‗non-policy‘ if none of the four policy kinds identified is considered the main cause of big changes in the stock market index. The first consistent explanation will be coded as the main cause of a daily index jump if two or more reasons are cited for explaining a big index movement.
Finally, the proportions of the different kinds of explanation are calculated and the results are used to display the different contributions of the four types of government policy to big movements of the SHCI. Given the problem of the availability of online newspaper articles, the sample period for this study covers only January 2001 to March 2016.