Funds Issuance and Market Volatility

Based on the experiments carried out in the simulated exchange independently developed by the Financial Engineering Laboratory of University of Science & Technology Beijing, this paper researched the impact funds have on the stock market after certifying the positive relationship between traders´ asset allocation and the stock price volatility. According to the positive correlation, the paper built a mathematical model of traders´ asset when funds are taken into our consideration. In the model, it certified the impact funds have on the stock market by computer simulation. As a consequence, funds have double effects on the stock market. When the funds assets account for less than 50% of total market assets, funds will lead to market volatility, when the proportion is more than 50%, funds will play the role of stabilizing the market. In addition, huge scale funds should be stopped because it may bring large volatility to the stock market. We recommend that it is good to repeatedly issue small scale funds instead of huge scale funds. Last but not the least, gradually increasing the quantity of issuing funds can not only avoid large market volatility, but also let the funds quickly play the role of stabilizing the stock market.