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Rational Panics, Absorbing Regime Switching And Stock Market

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Author Info
Yinggang ZHOU
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

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 681.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:681

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Related research
Keywords: Chinese Stock Market; Market Crash; and Inverted-S Demand;

Find related papers by JEL classification:
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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  1. Gennotte, Gerard & Leland, Hayne, 1990. "Market Liquidity, Hedging, and Crashes," American Economic Review, American Economic Association, vol. 80(5), pages 999-1021, December. [Downloadable!] (restricted)
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  2. Basu, K. & Genicot, G. & Stiglitz, J., 2000. "Unemployment and Wage Rigidity when Labor Supply is a Household Decision," Papers 00-01-11, California Irvine - School of Social Sciences.
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  3. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March. [Downloadable!] (restricted)
  4. Barlevy, Gadi & Veronesi, Pietro, 2003. "Rational panics and stock market crashes," Journal of Economic Theory, Elsevier, vol. 110(2), pages 234-263, June. [Downloadable!] (restricted)
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