Research On Investors’ Heterogeneous Beliefs And Stock Returns Of China’ S A-share Market

With the development of financial market, the standard financial theory which is based onefficient market hypothesis, capital and assets pricing theory and modern portfolio theory has beenchallenged by more and more financial abnormal phenomena. Scholars modify the traditionalfinancial theory and model through relaxing part of the assumptions. One of the key assumptions isthe investors have homogeneous belief. However, a lot of studies show that investors in financialmarket own heterogeneous beliefs. This feature is more obvious in China’s stock market for thereason that the investors of Chinese stock market are primarily constituted by individuals. Becausethese individuals have different conditions and information, they usually have different opinions aboutthe same stock. Under the condition of short-sale constraints, investors’ heterogeneous beliefs willexert influence on the equilibrium of assets’ prices and cause the overestimation of stock prices.In recent years, the assets pricing theory under the condition of heterogeneous beliefs hasdeveloped quickly, but it lacks empirical support from Chinese market. Based on the achievement offormer scholars, this thesis selects and constructs proper indexes to represent investors’ heterogeneousbeliefs according to Chinese stock market’s specialty. And we test the way in which investors’heterogeneous beliefs exert influence on the stock returns of China’s A-share market. First, weanalyze the causes of investors’ heterogeneous beliefs and the mechanism of its affection to assets’pricing. Then we propose the theory hypothesis of this article. Second, we discuss the strong andweak points of several indexes which can be used to measure investors’ heterogeneous beliefs. We useadjusted turnover rate, order book slope, order imbalance and average order spread as proxies forheterogeneous beliefs. In the main body of this thesis, we study the impact of investors’heterogeneous beliefs to stock returns of China’s A-share market under different conditions ofshort-sale constraints through asset portfolio approach and panel data regression.The empirical result shows that under the condition of stringent short-sale constraints, the stockswith high heterogeneous beliefs earn significantly higher contemporary returns than stocks with lowheterogeneous beliefs because the former are more overvalued. Meanwhile, the higher the investors’heterogeneous beliefs, the lower the stocks’ expected returns. It is because the overvalued stocks’prices will fall to their true values when the information fully spreads. When the short-sale constraintsare relaxed as a result of the margin trading system, the negative influence of investors’ heterogeneousbeliefs on stocks’ expected returns will weaken.