Government intervention model based on behavioral heterogeneity for China’s stock market

• Published in: Financial innovation (Heidelberg) Vol. 8; no. 1; pp. 1 - 19
• Main Authors: Zhou, Zhong-Qiang, Li, Jie, Zhang, Wei, Xiong, Xiong
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 01.12.2022; Springer Nature B.V; SpringerOpen
• Subjects: Behavioral heterogeneity; Big Data; Economic activity; Economics; Economics and Finance; Excess volatility; Foreign exchange markets; Government intervention; Heterogeneous agent model; International finance; Intervention; Investments; Macroeconomics/Monetary Economics//Financial Economics; Options markets; Political Economy/Economic Systems; Prices; Securities markets; Stock exchanges; Stock market crashes; Volatility; Excess volatility; Behavioral heterogeneity; Government intervention; Heterogeneous agent model
• ISSN: 2199-4730; 2199-4730
• DOI: 10.1186/s40854-022-00408-8

Active government intervention is a striking characteristic of the Chinese stock market. This study develops a behavioral heterogeneous agent model (HAM) comprising fundamentalists, chartists, and stabilizers to investigate investors’ dynamic switching mechanisms under government intervention. The model introduces a new player, the stabilizer, into the HAM as a proxy for the government. We use the model to examine government programs during the 2015 China stock market crash and find that it can replicate the dynamics of investor sentiment and asset prices. In addition, our analysis of two simulations, specifically the data-generating processes and shock response analysis, further corroborates the key conclusion that our intervention model not only maintains market stability but also promotes the return of risk asset prices to their fundamental values. The study concludes that government interventions guided by the new HAM can alleviate the dilemma between reducing price volatility and improving price efficiency in future intervention programs.