Research On Lead-Lag Effect Of Different Book-To-Market Ratio’s Stocks Information Diffusion

Lo and Mackinlay (1990) studied the lead-lag effect of stocks in American stock exchange market,which found that stock weekly return of small companies portfolio lagged compared to that of larger companies portfolio,not vice versa.That is to say, when the time series of the return are stable,because of the strong correlation between different scale companies,the ruturn of different stocks in a certain extent can be predicted in the short term.In addition,many of the leading researchers have studied the lead-lag effect of different stocks in European and American stock markets, including different trading volumes and lead-lag effect between the different stock returns in different industries,etc.Moreover, China’s stock market developed relatively late, compared with Western countries,which has a certain particularity. Under this background,lead-lag effect in China is relatively different to that of Western countries.This paper analyzes the lead-lag effect of information diffusion of the stock market in China from 2009 to 2014 by the degree of price delay.It’s based on the theory of market friction and delay adjustment price,using Hou and Moskowitz’s (2005) method of setting price delay index as reference.All the research objects are listed companies in SSE (Shanghai Stock Exchange). Firstly, this paper founds price delay index according to Hou and Moskowitz’s (2005) method and verifies the volume effect and scale effect of the lead-lag effect by the method.During the verification process, the author founds that even companies with very similar trading volume and scale still possess differences on the rate of public information diffusion, which is similar to h Bartosz Gebka’s (2008) research conclusion,stating that trading volume and scale can only be partial factors of lead-lag effect. Linked to Fama-French’s three-factor model and relationships of book-to-market ratio, investors’ attention and price adjustments, the author lists the characteristic value of different companies,finding that the reaction speed differences to information for companies with similar trading volume and scale is caused by the differences in book-to-market ratio.Based on above analysis,the author holds the hypothesis that book-to-market ratio affects the rate of diffusion of information and uses panel data model to verrify the hypothesis.After empirical analysis we draw the conclusion that lead-lag between stock returns have not only the scale and volume effects, than the stock market value of the book also affect the lead-lag effect of stock returns. Mainly reflects in that companies with lower book-to-market ratio carry information ahead higher book-to-market ratio companies.The lead-lag effect existing in China’s stock returns has profound significance for individual and institutional investors to have rational investment.