Heterogeneous Beliefs, Investor Sentiment And Premium Rate Of A Shares Relating To H Shares

Recently Behavioral Finance has developed tow asset pricing theories based on heterogeneous beliefs and investor sentiment, which have been proven to effectively explain the number of financial anomalies. In fact, compared to effective arbitrage, homogeneous beliefs and rational investors, short-sale constraints, heterogeneous beliefs, and sentimental investors are a more profound portrayal of the characteristics of China's capital market, by which we can distinguish China market and the Hong Kong market. Taking 57 dual-listing companies in A shares and H shares as samples between November 2006 to November 2007, this paper tries to explain the existence of widespread, long-term, non-rational premium of A shares relating to H shares by introduction of two new factors heterogeneous beliefs and investor sentiment. The results showed that under the conditions of short-sale constraints in the Mainland, the stronger heterogeneous beliefs investors have, the more easily A share price would be overestimated, and there would be a higher premium rate of A shares relating to the H shares; the higher the investor sentiment in Mainland markets, the more easily A share price would be overestimated, and there would be a higher premium rate of A shares relating to the H shares. In addition, the study also found that investor sentiment can enhance the effects of heterogeneity beliefs on the asset premium. The theories on heterogeneity beliefs and investor contribute to explain the irrational premium of A shares relating to H shares.