Study on Price Fluctuation of Industry Index in Chinas Stock Market Based on Empirical Mode Decomposition

Fu Qiao ()

Asian Economic and Financial Review, 2020, vol. 10, issue 5, 559-573

Abstract: Rotation is a classic method to describe how securities performance varies with specific factors, such as industry. However, in a short time interval, it is difficult to prove or to disprove the existence of rotation. This paper uses empirical mode decomposition (EMD) and principal component analysis (PCA) in combination to build a framework for analyzing the price fluctuation. Based on this framework, we analyzed the price fluctuations of the China Shenwan (SWS) Industry Index from 2007 to 2019. In the overall fluctuation of the 28 SWS industry index prices, the component that makes all index prices fluctuate in the same direction accounts for more than 75%. The one that makes the fluctuations in index prices varying with the industries accounts for 7%. The former component mainly features the periodic fluctuation, the later one mainly features the aperiodic, trending fluctuations. It means that in a time interval on a decade basis, the inter-industries difference of securities performance should be viewed as the difference of long-term trend rather than the periodic fluctuation (which is usually termed rotation). Therefore, investors who are interested in China's capital market should pay more attention to analyzing the long-term development trend of China's industrial economy, especially the major industrial policy issued by the government.

Keywords: China’s stock market; Stock price; Industry index; Empirical mode decomposition (EMD); Ensemble empirical mode Decomposition (EEMD); Rotation; Principal component analysis (PCA). (search for similar items in EconPapers)
Date: 2020
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