Illiquidity, Investor Sentiment And Stock Pricing

The traditional capital asset pricing model shows the relationship between asset's expected revenue and risk based on a simple linear expression and the beta coefficient tells systematic risk. However, The capital asset pricing model is based on a series of strict hypothesis, many afterwards study show the CAPM can't tell the relationship of asset's expected revenue and risk and beta coefficient lacks explanatory power of systematic risk. Hence, researcher are trying to softening the hypothesis of the CAPM and studying influence factors of asset's revenue from different angles.This paper assumes that asset's revenue obeys skewed distribution, the existence of transaction cost and noise traders. The assumption above leads to skewness, illiquid cost and investor sentiment. This paper considers factors of skewness, illiquid cost, investor sentiment, turnover rate and market value and builds the panel data regression model based on the trading data of Shanghai A-share during the periond of 2011-2014. The results show that illiquidity cost and investor sentiment have significant impact on the asset pricing process by empirical test, hence reveal the existence of illiquidity compensation as well as vast noise traders in Chinese stock market. And size effect is confirmed as well. Meanwhile the results show that system risk factor and skewness factor have no explanatory power in asset returns, the traditional capital asset pricing model doesn't comply in Chinese stock market.The corresponding suggestion is given to securities commission, listed companies and investors. Due to non-efficiency of Chinese stock market, securities commission should produce more transparent and efficient laws, inspect the authenticity of information published by listed companies and make sure that stock market is performing well. Listed companies should always uphold integrity management and focus on improving competitiveness which will improve confidence of investors.Investors should be rational and stable, and make their decisions by proper analysis instead of misleading.The conclusion of this paper shows influence factors of asset's revenue are various and beta coefficient lacks explanatory power of systematic risk. Researchers should try to study influence factors of asset's revenue from different angles in order to understand capital asset price formation system.