Study On Heterogeneous Expectations And Asset Pricing In China’s Stock Market

The traditional capital asset pricing model(CAPM), a key assumption is that all investors holding homogeneous expectations for the probability distribution of future earnings of the same kind of assets. However, this hypothesis is difficult to get confirmed by empirical study. Actual stock market investors by their own income levels, age, education, life experiences and other factors, the distribution of return of the same stock at the same holding period tend to have a different judgment, that is, investors’ opinion is different. This disagreement is heterogeneous expectations. In the real stock market, how the heterogeneous expectations instead of homogeneous expectations the assumptions and how the heterogeneous expectations affect asset prices has become crucial in financial studies.In this dissertation, analysis from a theoretical and empirical perspective of heterogeneous expectations and asset prices based on China’s stock market. By improve the traditional EKOP model, heterogeneous expectations factors are added to the model, in order to remove the effects of asymmetric information, to a more accurate measurement of investor disagreement. Data is selected of 30 individual stocks during the period of Jan 2010 to Jun 2012. Based the estimate results of the EKOP model, proper proxy of heterogeneous expectations is formed, as the measurement of investor disagreement of the uninformed investors in the China’s stock market.Panel data and panel regression analysis method are used to study how the heterogeneous expectations affect asset prices, and the factors affect heterogeneous expectations. The conclusion comes that the heterogeneity of investors’ expectation has a reverse impact to stock returns. The larger the investor disagreement is, the lower the return. And this kind of reverse impact dose more to do with the date, less to do with the individual stock.Panel regression is also used to analyze the factors affecting heterogeneous expectations. The result turns out that return, trading activity and volatility have a significant effect on heterogeneous expectations. The return and trading activity both have a reverse impact to heterogeneous expectations. The study also find that the larger the volatility is, the smaller the heterogeneous expectations is, which suggest that speculative trading is more in China’s stock market.