The Asset Pricing Model Based On Habit Formation And Adjustment Cost

It is a key issue to determine the equilibrium price of assets that all financial economists have consistently concerned with. With development of the economy, financial products and the financial system are getting increasingly complex, economists realize that the previous financial theories consider only arbitrage, equilibrium and so on, but neglect issues such as the analysis of the economic entities, which makes a lot of problems occur when they explain market behavior in reality by financial theories. Because of the limitations of the previous financial theories, more and more scholars begin to explain the complicated financial phenomena from the economic behavior, such as consumer habit formation and capital adjustment costs and so on, the effects on capital return have become an important research issue.In the classical consumption theory, the individual preference is usually assumed to be time-separable, that is, the utility of consumption is only determined by the current level of consumption; while habit preference believes that the individual preference is time-inseparable, that is, the current utility level depends not only on the current state of consumption expenses, but also on the previous consumption expenses level (relavent to lagging consumption). In the real world, as a pure individual decision-making behavior, consumption is subject to and influenced by consumer's decision-making mentality and behavioral habits to a large extent,under certain conditions, the impact of internal factors even exceeds the impact of income on consumption.Neoclassical investment theories, especially the Tobin's Q theory thinks that only when the market value is greater than the enterprise's replacement cost (or book value of the corporation), enterprises would feel that the investment is profitable. But this is not supported in reality, enterprises often engage in an investment when Tobin's Q is far greater than one. Capital adjustment cost theory gives an explanation to this phenomenon, which believes that enterprises have adjustment cost in the course of investment, one unit investment can not be transformed to one unit of the capital stock smoothly, and therefore only when enterprise's market value is greater than the sum of the replacement cost and adjustment cost, the investment of the enterprise is profitable.In the academic field, under the background of growing concerns on habit formation as well as capital adjustment cost, studies on the relationship between the two and the stock price is gradually gaining attention. However, the existing literature establishes capital asset pricing model based on consumption or based on production, the two are not integrated. This paper focuses on the Chinese stock market, studies the impact of habits formation and capital adjustment cost on asset prices using a general equilibrium model, which includes asset pricing model based on the market structure and asset pricing model based on investor sentiment. The main contribution and conclusions of this paper are as follows: First, on the basis of systematically reviewing the asset pricing theory, this paper constructs capital asset pricing model based on habit formation and adjusted cost, and uses stock transaction data in the Chinese market, calibrates the relationship between changes in the macroeconomic state and the return rate, volatility in the stock market, analyses the relationship between the return of assets and the market performance, capital adjustment cost, consumption habits. Conclusion shows that: enterprise expected return of stocks is positively correlated to corporate performance, prospects of the industry development, research and development capability, and negatively correlated to scale of the enterprises and the ratio of market / book value.Second, as the classical capital asset pricing model does not take into account the impact of the commodity market structure of the enterprise on the changes of stock return, the paper designs an asset pricing model based on the strategic behavior of enterprises. Introducing enterprise's strategic behavior can make the enterprise's production decisions, pricing decisions and the stock price of the enterprise link together under different market structure, this shows that the enterprises in different industries can have different stock prices, which accords with the fact that PE in different sectors and the dynamic PE are significantly different currently in the Chinese market.Third, taking into account that the Chinese market has not yet been an efficiency market, this paper also studies the stock prices when the market exists rational investors and sentimental investors, rational investors invest according to the fundamental value of the stock, they buy stocks when the stock price is lower than the fundamental value, and sell them when the market price is higher than the fundamental value, while the sentimental investors set a psychological price to each stock, which is different from the fundamental value, so the sentimental investors may overestimate or underestimate the value of stocks in equilibrium, rational investors hope that the stock price reverts to the fundamental value by making arbitrage, and changes of sentimental investors'sentiment may make the stock prices have greater volatility. Conclusion shows that in equilibrium, the expected the stock return considering sentimental investors consists of three parts: the first item is the expected weighted average return of the two types of investors, where weight is the pricing capacity of investors, second is arbitrage item, and another one is the covariance item of market sentiment and expected return of the investment.The innovations of this paper show as following: The main ideas include the following:First, this paper establishes asset pricing model in general equilibrium based on habit preference and capital adjustment cost(HAM in abbreviation), the four pricing factors are: market portfolio, enterprise's performance, adjustment cost and ratio of book value and market value, representative variables are the stock return of market portfolio, earning per share, book value of enterprise's equity and the ratio of book and market value, and does empirical research on the relationship between the stock return, habit preference and capital adjustment cost using Chinese stock market data, and calibrates the parameters of habit preference, capital adjustment cost and changes of the macroeconomic status.Second, this paper studies the relationship of industries'concentrated degree and stock return under incompletely competitive conditions to establish a HAM based on market concentration, emphasizes on different enterprises'strategic behavior, especially the impact of the pricing behavior of different enterprises on stock return, educes five-factor capital asset pricing model. This model includes market structure factor on the basis of consumption habit and capital adjustment cost model, the representative variable of market structure is HHI index. Also using market transaction data, this paper tests the linkage of industry's market concentrated and stock return, and finds HHI index in the pricing model is significantly not zero.Third, this paper derives the relationship between investor sentiment and the stock return in equilibrium and establishes a HAM based on investor sentiment, assuming there are rational investors and sentiment investors in the market. Six-factor asset pricing model is put forward, this model includes arbitrage pricing factor and setiment pricing factor. Thereafter, this paper does empirical research on the rationship of investors'sentiment and stock return, using Chinese market data. This paper finds the two pricing factors have significant effect on stock return.