Fundamental Price Anomaly,Return Explanations And Arbitrage Strategy

The Capital Asset Pricing Model(CAPM)and Arbitrage Pricing Theory(APT)tell us that stock returns are determined by a number of risk factors and have no relationship with their prices;Although the Dividend Discount Model(DDM)shows that for high-risk stocks,a higher discount rate is required,which causes its price to fall,but the impact is still limited to the range of risk factor pricing,and requires that the dividend and its growth rate to be fixed.In terms of empirical analysis,many relevant results from Chinese stock market and foreign stock market show that stock prices are related to their return.Early research shows that stock prices are negatively correlated with their return.Recent studies have shown that stock prices are positively correlated with their return,and this correlation still exists after considering various risk pricing factors which means that there is a price anomaly in the stock market.This price anomaly also exists in the Chinese A-share market.Considering that the dividend discount model reveals that the risk factor pricing has a certain influence on the relationship between stock price and return,the relevant domestic and foreign empirical research basically ignores the impact of the stock price implied on the return expectation,so this paper introduces a concept-Fundamental price-to examine the price anomaly in China's A-share market.The research idea of this paper is,firstly,to use the dividend discount model to theoretically analyze the determinants of stock prices;Secondly,a price based on these price determinants is fitted,this article calls it fundamental price;Finally,make empirical analysis between the fundamental price and return to testwhether there is a correlation between them,that is,whether the fundamental price anomaly exists,and then analyzes its causes and arbitrage strategy.Specifically,first,based on the dividend discount model,the determinants of stock prices are theoretically derived.In this paper,we use the dividend discount model in the case of fixed growth to analyze the determinants of stock prices from the company level.Secondly,this paper takes the stocks of the Shanghai and Shenzhen stock markets in the Chinese market as the research object.The sample interval is usedfrom December 2006 to December 2017,using the combination spread method,the Fama-French three-factor and five-factor model,and the Fama-MacBeth regression.The method examines the existence of nominal price anomalies and fundamental price anomalies in China's A-share market and examines the persistence of fundamental price anomalies.Third,based on behavioral finance,this paper analyzes the possible causes of fundamental price anomaly,including stock gambling,investor preferences,investors'sentiment and analysts'bias.Fourth,based on the above analysis,the investment strategy of fundamental price is constructed,and the empirical results are examined to conduct empirical analysisThe main research contents and related conclusions of this paper are as followsFirst,the existence tests of the nominal price anomaly and the fundamental price anomaly.The empirical results show that:(1)The nominal price anomaly does not exist,although it is a phenomenon of low-price stock premium,but there is no risk-adjusted return after considering the risk pricing model;(2)The fundamental price anomaly has a high-priced stock premium phenomenon,and this is not explained by the traditional risk pricing model;(3)Compared with the BW estimation method,the extended BW estimation method proposed in this paper is better,that is,the extended BW method estimates a more significant relationship between the fundamental price and its return,at the same time,the fundamental price anomaly is more persistent than BW estimation methodSecond,analyze of the causes of the fundamental price anomaly.This paper examines the effects of stock gambling,short selling restrictions,investor differences,institutional investors' positions,market sentiment,and analyst bias on the fundamental price anomaly The results show that the above factors can only partially explain the fundamental price anomaly.While the above factors have the same effect on the fundamental price anomaly estimated by the BW estimation method and the extended BW estimation method:(1)The larger the short-selling limit and the higher the short-selling risk,the stronger the fundamental price anomaly;(2)The gambling effect of stocks and the differences of investors will strengthen the fundamental price of stocks;(3)the higher the proportion of institutional investors,the weaker the fundamental price anomaly;(4)When the market sentiment is high or the market sentiment changes drastically,the fundamental price specs are stronger;(5)The lower the fundamental price,the more likely the stock reorganization occurs,and the nominal price has no effect on the company's asset reorganization;(6)Analysts tend to give higher target prices to stocks with lower fundamental prices.In summary,rationality and the way to increase market efficiency will weaken the fundamental price anomaly,while irrationality and the way to lower market efficiency will strengthen the fundamental price anomaly.Finally,based on the previous analysis,this paper constructs two basic price investment strategies based on BW estimation method and extended BW estimation method.By analyzing the industry characteristics and monthly effects of the two investment strategies,the two strategies are optimized and both strategies can achieve better risk-adjusted returns.At the same time,the risk-adjusted returns of the fundamental-price investment strategy based on the extended BW estimation method perform better than the fundamental-price investment strategy based on the BW estimation method.Compared with the existing research,the academic contribution of this paper may be mainly reflected in the following aspects:First,this paper attempts to propose the concept of fundamental price for the first time and examines the existence of the fundamental price anomaly in China's A-share market.Although domestic and foreign reserchers have studied the nominal price anomaly,from the results of empirical tests,domestic and foreign research did not make agreements on the existence of nominal price anomaly,and did not consider the dividend discount model revealed the correlation betweenlow-price stocks with high returns.This paper proposes that the fundamental price is used to distinguish the difference between the fundamental price anomaly and the nominal price anomaly,which helps to understand the existence and characteristics of the nominal price vision.Secondly,this paper attempts to investigate the stock price determinants from theoretical analysis,and proposes a new fundamental price estimation method based on this which could examine the fundamental price anomaly.Although the BW method can be used to estimate the fundamental price,considering the lack of theoretical basis of this estimation method,this paper analyzes the determinants of fundamental price based on the dividend growth model theoretically,and proposes a new fundamental price estimation method based on this.The new method which called extended BW estimation method could then examine the existence and persistence of the fundamental price anomaly.By comparing the fundamental price anomalies obtained by the two estimation methods could provide new ideas to solve the price-related market anomaly.Third,this paper attempts to explain the fundamental price anomaly from the gambling of stocks,investor differences,institutional shareholding and market sentiment.Although domestic research has studied nominal prices from the perspective of policy and behavioral finance,its interpretation is small and did not comprehensive enough.This paper analyzes the abnormal return of fundamental price from the risk model pricing,stock gambling,institutional investor holdings,short selling restrictions,investor differences,mergers and acquisitions,investor sentiment and analyst behavior.And it is found that the above factors have certain explanatory power for the formation of fundamental price anomaly.At the same time,by analyzing its impact,it can provide reference for the regulatory authority to develop effective regulatory measures.Fourth,this paper builds a long-short strategy based on the fundamental price anomaly and examines the risk-adjusted returns through an optimization strategy.Domestic and foreign researchers have studied many kinds of market anomalies,but only some of them have formed their research results into corresponding investment strategies.This paper analyzes the characteristics of the industry and the seasonal effects based on the test of the fundamental price and construct an optimumfundamental price investment strategy.This paper's research and analysis of the fundamental price anomaly will help the investment companies build a hedging strategy to achieve excess returns while reducing costs.