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A simple model for government intervention in China’s stock market

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  • Zhou, Zhong-Qiang
  • Huang, Ping
  • Hooy, Chee-Wooi

Abstract

This paper develops a simplified heterogeneous agent model to analyze the Chinese government’s stock market intervention strategy, emphasizing governmental trading behavior. We characterize the government as an exogenous agent interacting with fundamentalists and chartists, enabling us to examine intervention effects on market sentiment and price dynamics. Utilizing daily CSI 300 index data from 2015 to 2022, the model captures dynamic shifts in investor composition and quantifies the government’s role in curbing excess volatility. Our results indicate that government intervention, implemented via a simple linear feedback rule, effectively reduces significant price deviations and aligns market valuations more closely with fundamentals. This study contributes to the literature by proposing an intuitive framework that estimates critical parameters of government intervention, thus providing novel insights into its implications for financial market stability.

Suggested Citation

  • Zhou, Zhong-Qiang & Huang, Ping & Hooy, Chee-Wooi, 2025. "A simple model for government intervention in China’s stock market," Finance Research Letters, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:finlet:v:83:y:2025:i:c:s154461232500902x
    DOI: 10.1016/j.frl.2025.107643
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    References listed on IDEAS

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    1. Boswijk, H. Peter & Hommes, Cars H. & Manzan, Sebastiano, 2007. "Behavioral heterogeneity in stock prices," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 1938-1970, June.
    2. Zhong-Qiang Zhou & Jie Li & Wei Zhang & Xiong Xiong, 2022. "Government intervention model based on behavioral heterogeneity for China’s stock market," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-19, December.
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    7. Li, Hui & Liu, Kerry, 2024. "China's National Team: A Game Changer in Stock Market Stabilization?," Finance Research Letters, Elsevier, vol. 61(C).
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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