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Rational Panics, Absorbing Regime Switching And Stock Market

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  • Yinggang ZHOU
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    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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    File URL: http://repec.org/esFEAM04/up.12721.1080702821.pdf
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    Bibliographic Info

    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;

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    1. Gerard Gennotte and Hayne Leland., 1989. "Market Liquidity, Hedging and Crashes," Research Program in Finance Working Papers RPF-184, University of California at Berkeley.
    2. Barlevy, Gadi & Veronesi, Pietro, 2003. "Rational panics and stock market crashes," Journal of Economic Theory, Elsevier, vol. 110(2), pages 234-263, June.
    3. 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.
    4. 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.
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