Statistical Modeling of Overconfidence and Speculative Bubbles in China's Stock Market

Abstract

This paper firstly reveals the internal mechanism of overconfidence and market liquidity positively affecting the stock market speculative bubble and proves the difference in the effect of different degrees of overconfidence and market liquidity on the bubble, and then combines the time-varying transition probability. The Markov Switching Time-Varying Transition Probabilities (MS-TVTP) constructs a dynamic evolution mechanism model of China's stock market bubble (VNS three-zone variable expansion model) that includes investor overconfidence and market liquidity. The results show that the stock market bubble extracted by the VEC model is consistent with the actual. Compared with the 2008 financial crisis, the regional effect of China's stock market bubble before and after the crisis is more obvious. The increase in investors' overconfidence will increase the bubble from the latent zone. The probability of conversion to the expansion zone system, the negative change in market liquidity increases the probability of the foam transitioning from the expansion zone system to the rupture zone system.