| On May 17th ,1972,twenty-four security dealers underwrote an agreement named Buttonwood which symbolized as the advent of the security market. The issue at the heart of the security market since its advent is the pricing of financial assets. But the understanding of financial asset pricing in both the Economics Academia and practical circles is far away from the demand of financial market development. The financial asset pricing theory had been developed quickly after the publication of the Von Neumann and Morgenstern's VMUT in 1944. The Average-Variance portfolio theory and Capital Asset Price Model (CAPM) theory were developed one after another which were based on rational hypothesis and VMUT theory. While the CAPM theory was popular in the security market, some phenomena appearing in the operation of the security market which is opposite to the classic theory began to challenge the classic CAPM theory and reveal to the world the existence of flaws in the CAPM theory. A lot of economists come to an agreement that it is the assumption of rational man in the theory that the problem lies in. At the same time the irrational hypothesis was recognized. Prospect Theory based on irrational hypothesis was proposed by Kahneman and Tversky as a substitute of VMUT. Prospect Theory links Economics with psychology and gave a new angle of view about the behavior of the decision makers. Some economic models based on Prospect Theory gave a better explanation about financial market.This paper discusses the affect of liquidity bias as a psychological factor on the pricing of the stocks with a high bonus andβ<1 using the method combining both theoretical deduction and empirical testament. The paper is divided into four chapters. Chapter one introduces the foundation of the traditional classic Economic theory i.e. the rational hypothesis. The paper then introduces the irrational hypothesis and the development of financial asset pricing theories. This part emphasizes the flaws in traditional theories and Prospect Theory of behavior finance which is based on irrational hypothesis and is recognized by the Economics Academia and practical circles after the 1970s. Chapter two gives a explanation on liquidity bias. There are mainly two reasons: (1)cash bias based on time factor.(2)cash bias based on uncertainty factor. This part also proposes a subjective discount rate concept and uses it as a substitute of discount rate without risk in CAPM. Then it proves the stock which has a high cash bonus andβ<1 will be overrated by investors who have liquidity preference in theory. This kind of investors will give a higher price than the price given by CAPM. So they would buy more of these stocks. This selection will increase the demand of these stocks and the price of them will rise. The price will be higher than the price given by CAPM. Chapter three uses the data of bonus indexes and colligated indexes in Shanghai Security exchange to represent the portfolio of stocks with high bonus and market portfolio respectively. Then we use the growth rate of these data as their respective rate of return to make a regression analysis and a series of statistical test using discrete point figure, T test, F test, variance ANOVA test and the analysis of the standard P-P figure of the regression standard deviation. From the analysis above this paper derive that the correlation coefficient of the monthly close bonus index and the colligated indexes in Shanghai Security exchange between Jan. 1st 2005 and 31 Dec. 2006 is 0.0930, the regression coefficient of the independent variable is 0.898, and the level of significance of these two results are 0.00 which means that the regression result is statistically significant. The regression analysis mentioned above show that the averageβof the component stock of the bonus index of the Shanghai stock exchange is smaller that 1. This conclusion also proves the deduction of Chapter two which means component stock of the bonus index of the Shanghai stock exchange is overrated. Chapter four introduces the regime of stock issue and the factors considered during its pricing and propose that the liquidity bias will affect the price of the stocks with high bonus. Finally, the paper appeal to lay enough emphasis on the liquidity bias during the pricing and issue of stocks.The most remarkable innovation of this paper is the consideration of the affect of the liquidity bias on the pricing of the stocks with high bonus and the regression analysis of the bonus index and the colligated indexes in Shanghai Security exchange, the empirical analysis verifies the theoretical deduction. This paper does not give the pricing model which considers the liquidity bias because of the limit knowledge and ability of the author and the far imperfection of the Prospect Theory. But the objective of this paper is to appeal to Academia and practical circles to lay enough emphasis on the factor of liquidity bias in order to make the pricing of stocks more reasonable and accurate. The author hope that through the research of this paper people will pay more attention to the phenomenon of liquidity bias which appears in both Economics and psychology. |
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