Expected Return,Trading Volume And Mispricing

The problem of asset pricing has always been a major direction of financial research.Around asset pricing,scholars have established asset pricing models to find the factors affecting stock returns.After years of development,the asset pricing theory has become quite mature,and the Fama and French(1993)three-factor model is now mainly used by academics to study and explain stock returns.However,scholars have found that there are still many phenomena in the market that cannot be explained by mainstream asset pricing models.these unexplained phenomena are known as market anomalies,and market anomalies can lead to mispricing of stocks.yufeng et al.(2022)argue that heterogeneous volume-return relationships may arise if volume measures investor disagreement,while mispricing measures investor expectation bias.Based on this assumption,Yufeng et al.conducted a study in US stocks and found that trading volume has a magnifying effect on mispricing by introducing a volume factor.Specifically,they use the US equity market to find that mispricing is concentrated in high volume stocks.That is,expected returns are positively correlated with trading volume in undervalued stocks,while expected returns are negatively correlated with trading volume in overvalued stocks.This paper attempts to rely on his research to explore whether the Chinese stock market has the same effect.The GEM is more prone to stock mispricing due to its high growth and risk characteristics,and therefore the sample data for this paper is drawn from the A-share GEM.Mispricing is the core metric of this paper.The traditional method of measuring mispricing is by calculating the intrinsic value of the firm against the market capitalisation of the firm,but this method as a starting point for measuring the degree of mispricing of assets has certain shortcomings.In this paper,based on Stambaugh et al.’s(2017)approach of constructing a mispricing model,six appropriate market anomalies for A-shares are identified,and then multiple market anomalies are ranked to obtain a mispricing indicator.The amplification effect of trading volume was then tested using double grouping analysis as well as Fama-Macbeth regressions.In the robustness check section,the paper replaces the mispricing indicator and re-runs the empirical analysis on the one hand and considers controlling for possible competing variables on the other.The final findings of this paper are as follows: 1.This paper obtains the mispricing indicators of individual stocks through the mispricing model established by market anomalies.There is a significant relationship between mispricing and the expected return of the A-share GEM.That is,the degree to which a stock is overvalued is negatively related to the stock’s expected return.2.The amplification effect of trading volume on mispricing is also present in China’s GEM market but not as significant as in the US stock market.An empirical study of the dual grouping of mispricing scores and turnover rates shows that expected returns are significantly positively correlated with turnover rates in undervalued stocks,so that an increase in trading volume amplifies the degree to which a stock is undervalued;however,this effect is not significant in overvalued stocks.This result holds after Fama-Macbeth regressions and robustness tests.The main contribution of this paper is to explore the relationship between transaction volume and yield from the perspective of wrong pricing.Previous studies on mispricing mainly focused on the application of mispricing anomalies to the stock market,but less on the interaction between mispricing and other variables.From the perspective of stock mis-pricing,this paper explores whether there is interaction between stock trading volume and mis-pricing,and promotes the value discovery of the stock market.In addition,according to the conclusion of this paper,it may be possible to add new factors to the asset pricing model and build a new multi-factor model to better explain the stock return.