Research Of IPOs' Pricing Based On VaR Theory

Initial Public Offering (IPO), is the first public sale of stock by a private company to potential investors in the stock market, with the help of an investment bank and their agencies. The purpose of the conduct is to collect equity capital. In China, IPO is referred to as New Stock Offering or Primary Market Offering. Right from the stat, how to price a stock on IPO has been one of the most confused problems in the capital market, as well as a mutual focus by academic field and by practice field. IPO pricing is a core process of the offering procedure, the rationality of which not only affects vital interests of the issuer, investors and underwriters, but also has direct impacts on effective recourse configurations of the capital market. As China's security market has developed for not very long, complete and perfect rules and regulations have yet to establish, plus the impacts by complex internal and external factors, it is therefore hard to find out a completely true and subjective price for a New Stock Offering. Many scholars home and abroad have conducted many empirical analysis on different phases of China's IPO markets, which indicate that the extent of issuing underpricing of stocks is higher than that of developed countries. Therefore, it is of active and realistic significance to establish a scientific and reasonable IPO pricing .In China's security market, there are many factors that affect IPO pricings in Stock A market. Some of them are external, some internal. This thesis first interprets conventional evaluation models such as income discount model, comparative corporation analysis method, option valuation model, etc, as well as pointing out their scope of application, advantages and disadvantages. Then it makes a review of new stock offering and pricing patterns over the IPO market development of China. Based on these theories and experience, considering, the status quo of China's security market. The thesis has made an analysis of the most common theoretical IPO pricings of China's corporations and has taken account of the special characteristics of China's stock market. Based on average P/E of the industry, value-at-risk model has been applied into the research on China's new stock pricings during the course of pricing. Some improvements have been made upon the theoretical IPO pricing model. In theory, by selecting the comparative corporation of the underlying corporation, the experiences of experts from investment banks are enabled to combine with the subjective value evaluation. The thesis has taken overall considerations on risks that may affect new stock pricing between the date of issue and the date of market, thus the risk of uncertainty in new stock pricing has been presented in the course of pricing. By referring to the VaR of the comparative corporation between the date of issue and the date of market of the underlying corporation, the price offering of the new stock could be finally established. At the end, the thesis has given an example of the Construction Bank of China as the case, which conducted IPO in China's capital market in 2007. In this case, value-at-risk evaluation model has been adopted to price the new stock and has achieved good result. The reasonability of applying the value-at-risk model into new stock pricing is therefore verified.