Empirical Study On Value Investment In China's Stock Market

In a mature, healthy and rational security market, stock price should conform to stock's intrinsic value and reflect its changes in time. For the stocks chosen by Value investment strategy, its market price should be explained more extensive and deeply by fundamental factors than ordinary stocks. In the past several years, as one of the most important security markets in the world, the situation of China security market is obviously not rational and mature. Considering this, the article studies the relationship between China value stock's price and fundamental factors by the theoretic and empirical method.The writer firstly introduced the connotation of the theory of investment value in the Chapter Two. This is to lay the foundation for the theoretic and empirical method. There is no exact concept about Value investment, although the whole world using the Value investment. After researching relative literatures, this paper summaries several characteristics about Value investment.1. The Value investment is on the premise that stock price is fluctuate around value.2. Finding the stock of its price less than value and investors can buy when the price has certain safe margin.3. If stock's price is not outstripping its reasonable value, investors go on to hold it.4. Value is decided by the future profitability. This paper reviews the performance study to the Value investment strategy abroad, after connotation of Value investment. We can find that Value investment can mostly bring good profit by studying these literatures. However, foreign scholars have different explanations on the reasons why Value investment policy can get superior earnings. This paper studies the theory of investment value applying to China's stock market or not from different angles in Chapter Four.According to the concept of the Value investment, people usually classify firms that have high ratios of book to market equity (B/M), earnings to price (E/P), or cash flow to price (C/P) as value stocks, and have low these ratios as growth stocks. Referencing the methodology of investment portfolio by LSV, the paper classifies all the A-stocks in China's stock market as value-investing portfolio and growth-investing portfolio based on B/M, E/P and C/P ratios. And then it compares the profitability between value stocks and growth stocks to test the performance of value strategy, furthermore, the paper tries to shed more light on the potential explanations for why value strategy work based on modern finance theory and behavioral finance theory. In this empirical study, the results show that value strategy is efficient in China stock market.In the end, the paper takes use of the Fama and the French's CAPM model theory and LSV's Contrarian Model separately to explain why value premium exists in China's stock market, and discovers that the premium can be interpreted by market risk factors and the Contrarian Model.