The Research Of "Low Price Effect" In A Share Market

As the German poet Bertolt Brecht once said:"I do not know what kind of rice,I know only its price." No matter if it's physical assets or financial assets,the price is the first information passed to buyers and sellers.Much information that hidden deep is often expressed through the form of price.Price level as a major stock characteristic has long been overlooked by people.One of the most important reasons for this is that the market generally thinks that the price is neutral and the price itself does not affect the stock yield.However,there are common "stock price management actions" taken by many listed companies,that is,through stock splitting,converting shares,bonus shares and other ways to reduce the stock price;regardless of being in the US stock market or the Chinese stock market,the average price of stocks and the median price relative to the market index and the company's market value are often growing too slowly,or even showing a downward trend.SWS Index Company's Low Price Index,Medium Price Index price and High Price Index,also show a significant deviation,the performance of the Low Price Index is significantly better than the Medium Price Index and the High Price Index.This seems to indicate that the price itself is not neutral.This paper takes the low-price shares in the A-share market as the research object,and selects the data from 2000-2016 of the A-share listed companies in Shanghai and Shenzhen exchange main boards,as well as the ChiNext and SME boards.After the data is cleaned,every year's June last trading day's closing price is taken,then according to the relative price method and the market division to select low-priced and high-priced stocks,we compute different price groups' mean-weighted and market-value weighted monthly average return.Empirical studies have found that low-price stocks have higher yields than high-price stocks,this higher yield is not due to lower prices bearing higher risk,in other words,low-price stocks have a "low risk,high yield" peculiarity.This good characteristic of low-price stocks appears independently of time intervals and market conditions,but in a bull market,this phenomenon is particularly evident.Apply different price groups into the Fama-French three-factor model,the research also found that the low-price portfolio had a significantly more positive alpha than a high-price portfolio alpha.Judging from this,in the A-share market low-price stocks present higher yield than high-priced stocks,this phenomenon we call "low-price effect."In order to test whether the "low-price effect" is caused by other factors that can influence the stock yield,this paper,after controlling for market value,Book to Market value(BM),momentum effect(reversal effect),liquidity and volatility,computes different price groups' original yield and the Fama-French three-factor model regressed alpha.The results found that after controlling for these factors,the "low-price effect"still exists,that this effect is not caused by the known market size effect,BM effect,momentum or reversal effects,which meaning the price factor itself can affect the yield.Since the market value,Book to Market value,momentum effect or reversal effect,liquidity and volatility are not the causes of the "low price effect",based on the analyzes of A-share market trading system,investor's structure,market sentiment and investor's decision psychology,this paper put forward several conjectures to explain why "low-price effect" exist,these conjectures are new investor preferences,market heterogeneous beliefs,growth space illusion(nominal price illusion)and "windfall"profits speculative thinking.At the end of the paper,the price factor is used as a pricing factor.Consulting the Fama-French three-factor model's SMB and HML factors' construction method,the research defines a new factor named DMG.After adding the DMG factor into the three-factor model,a new four-factor model is obtained and the regression analysis shows that for different price groups,the excess returns alpha regressed by four-factor model is lower than when using the three-factor model,and significance is reduced,the coefficient of determination increased,and low-price stock group's alpha subtracted by the high-price stock group's alpha is significantly reduced.In other words,the new four-factor model achieves better market interpretation than the three-factor model.