Understanding the Chinese stock market

The definitions of the bear, sidewalk and bull markets are ambiguous in the existing literature. This makes it difficult for practitioners to distinguish between different market conditions. In this paper, we propose statistical definitions of the bear, sidewalk and bull markets, which correspond to the three states in our hidden semi-Markov model. We apply this analysis to the daily returns of the Chinese stock market and seven developed markets. Using the Viterbi algorithm to globally decode the most likely sequence of the market conditions, we systematically find the precise timing of the bear, sidewalk and bull markets for all the eight markets. Through the comparison of the estimation and decoding results, many unique characteristics of the Chinese stock market are revealed, such as ‘crazy bull’, ‘frequent and quick bear’ and ‘no buffer zone’. In China, the bull market is more volatile than in developed markets, the bear market occurs more frequently than in developed markets, and the sidewalk market has not functioned as a buffer zone since 2005. Possible causes of these unique characteristics are also discussed and implications for policy-making are suggested

Business · China · Chinese market · Decoding methods · Economics · Financial economics · Financial market · Geography · Markov chain · Statistics · Stock (firearms · Stock market · Telecommunications · Viterbi algorithm · Complex Systems and Time Series Analysis · Computer Science · Financial Markets and Investment Strategies · Financial Risk and Volatility Modeling · Mathematics · Finance

• All That Glitters

  Brad M Barber, Terrance Odean•Review of Financial Studies•2008

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