The Chinese Stock Market Value Of The Investment Strategy Of Empirical Research

Since China's Stock market is very prosperous in 2006 and 2007, many individual investors and institutional investors are struggling to put money into this market, but the investment is not speculation, of all kinds of investment strategies nowadays, the value investment is a quite long-time stable investment way, and Warren Buffett, often called the Sage of Omaha is a big fan of this strategy. The core of value strategy is that the stock market is not a effective market, and it cannot reflect the company's complete information promptly, so it demands us that when company's intrinsic value is lower than the market price, namely the stocks have the margin of safety, we should buy these stocks and by the other hand, we sell the stocks when the stocks'price is higher than the intrinsic value.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), dividends to price(D/P), or cashflow 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. During the sample years, the accumulative portfolios returns difference between value stocks and growth stocks based on B/M ratio is 320%, at the same time, the accumulative portfolios returns difference based on E/P and C/P is 74.5% and 320.7% respectively.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, but not the Contrarian Model.