Rational Panics, Absorbing Regime Switching And Stock Market

Yinggang Zhou

No 681, Econometric Society 2004 Far Eastern Meetings from Econometric Society

Abstract: A government policy regarding the reduction of state shares in state-owned enterprises (SOE) triggered a crash in the Chinese stock market. The sus- tained depression even after policy adjustments constitutes a puzzle— the so called “state-share paradox.”The empirical evidence shows that the sustained depression is supported by a regime switching model with an absorbing state. The theoretical explanation developed in this paper arises from the concept of rational panics, which generates an inverted-S actual demand curve and gives rise to potential multiple equilibria. Rational panics hypothesis in this paper suggests that the dual pricing system and the quota on the overall stock supply represent major policy failures

Keywords: Chinese Stock Market; Market Crash; and Inverted-S Demand (search for similar items in EconPapers)
JEL-codes: E65 G18 O16 (search for similar items in EconPapers)
Date: 2004-08-11
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