Information Cascade and Share Market Volatility: A Chinese Perspective

The purpose of this paper is to understand the underlying dynamics for the share market bubbles in China during the most recent decade. By using the behavioral finance theory and the Shanghai Composite index prices during the periods from 2005 to 2008 and from 2014 to 2015 as the study samples, we find that the large volatilities in the Chinese share market are closely related to information blockage, which impedes share prices to timely respond to economic conditions as well as external shocks and increases (decreases) the demand of shares when the supply is difficult to adjust. Although the Chinese government has introduced a series of programs designed to increase more reliable information to the public, the share market still tends to confront issues of information asymmetry. The potential reason is that the reforms did not change the long-stand situation in China, where individuals or groups related to government bureaucracy who play a dominant role in the society are given priority to gain access and obtain information that benefits. By identifying the main reasons for the large volatilities in the market, policy makers are given advice as to which areas they may need to focus on to improve future market performance.