Stock Pricing Model Under Inefficient Market

Are stock prices determined by fundamental value, or in other words, do " bubbles" exist? This is a controversial issue in stock-market-based study . Because value is unobservable and difficult to be estimated exactly via the existing models, empirical studies that intend to fit the estimated value on prices have failed in deriving satisfying results, and even the same results may be explained in different ways. Theoretically speaking, only in perfect efficient market, the stock price is determined by its fundamental value. Unfortunately, such perfect market does not exist. In inefficient market, bubbles do exist in stock prices. This dissertation explores the stock pricing mechanism in inefficient market and finds that in inefficient market such as Chinese stock market, the stock prices have always been driven up on purpose during the initial public issuing period, and lead deviation of prices from their intrinsic value. Unfortunately, the rational investors in the market only possess limited ability to correct mispricing, and hence let the bubbles do exist. Some of them even speculate in bubble stocks. More worse, due to lack of effective regulation, the stock price is easily to be manipulated. These factors mixed together allow the persistence of rational and irrational bubbles. Based on these observations, accounting for the rational and irrational bubbles, this dissertation derives a new dynamic pricing model. By regressing prices on lagged prices, unexpected earnings, dividends, and other non-value-relevant variables such as negotiable share size, the model could identify whether bubbles exist in the prices or not. Resorting to signal filter principle, the model even could estimate how much bubble exist in the price.The main academic contributions are provided as follows:1. Based on the Ohlson(1995)'s model, the stochastic pricing model and the rational speculative bubbles model developed by Diba and Grossman (1988), this dissertation derived a new dynamic pricing model, which can be used as an empirical model for testing rational and irrational bubbles.2. This dissertation makes some new discoveries. First, I find that the deviation of accounting book value from its fundamental value is not only because of conservatism, but also because of the modern accounting system's neglect of time value of money. Second, I find that if there were no value-relevant information existing, the expected value of the stock would not have changed. Third, Contrary to Ohlson (1995), I find that dividends policy is value-relevant. Finally, the paper shows that earnings' persistence is positively related with its price reflecting coefficient. That is, the more persistent the earnings is, the bigger coefficient of unexpected earnings the price has.