Source Of China's Stock Market Value Premium Study

Since 1960s, Fama's Efficient Market Hypothesis has dominated the research of pricing theory. For a long time, it is believed that security price reflects information completely, future price is unpredictable, and no investor can earn premium returns basing on the information. However, the researches from 1980s until now discover that some stocks or portfolios have certain predictable model, through which investors can earn premium returns, and that the stock market is not as efficient as what Efficient Market Hypothesis states. Among these researches, Value Premium issue gains popularity, and the scholars try to explain the cause of the premium return from the aspects of risk premium and investor sentiment.This paper is based on previous studies of value premium. The sample is from Shanghai and Shenzhen Stock Market, all the A stocks issued before 1999 are included. The paper tries to answer three questions: (1) whether there is value premium in China's stock market; (2) whether the value premium is caused by risk premium; (3) whether the value premium is caused by investor sentiment.The findings are: (1) the two-dimensional variable of price/cash flow ratio and price/book value ratio is the best to select value stocks and glamour stocks; (2) there is significant value premium in China's stock market, and the longer the value stocks are held, the larger value premium is gained, which means value strategy works in China;(3) the value premium in China's stock market cannot be explained by risk premium;(4) the value premium in China's stock market can be explained by investor sentiment, which means that investors extrapolate the past to the future basing on history information, and are over pessimistic about value stocks, over optimistic about glamour stocks.