Heterogeneous Beliefs, Short-sales Constraints And Stock Price Behavior

Why are there stock market anomalies such as IPO underpricing, in stock market which should be "efficient" in the classic capital asset pricing theory? Why are there bubble and crash in stock market which should be equilibrium in the classic capital asset pricing theory? Especially Chinese Stock market has been and is experiencing big bubble and crash. Based on the two basic characters of Chinese stock market, heterogeneous beliefs among investors and limited short sales, this paper provide a story in reason about the phenomena without reason.In Chinese stock market, higher dispersion of beliefs is implied by the investors structure composed mainly of private investors and the blocked information diffusion. And there are high short sales costs in Chinese stock market now and in the future. The asset pricing theory based on heterogeneous beliefs predicts that stock price will reflect the optimistic view in the stock market with heterogeneous beliefs and short-sales constraints because the limited short sales constraint the trades from the investors with the lowest valuations. The stocks with higher dispersion of opinions are more overvalued in the short run and earn lower future returns. In the dynamic world, heterogeneous beliefs will induce the resale option with positive value whereby the current buyer is willing to pay above his or her own fundamental valuation because the buyer believes that in the future he or she will be able to sell the stock to other optimistic agents for a better price. This action causes a speculative bubble in the stock market. However, because of short-sales constrains, the originally bearish investors' information is not revealed in prices. When other previously bullish investors bail out of the market as information flows, the originally bearish ones may become marginal "support buyers" and more will be learned about their signals. Thus accumulated hidden information comes out during market declines. Stock price crashes.In the stock market anomalies, such as IPO underpricing, momentum effect, earnings drift, stock price actions in the same behavior which is short-term overvalued and long-term underperformance just as the heterogeneous beliefs theory predicts. In the third chapter, an empirical research is explored about the relation between the heterogeneity of beliefs and Chinese stock market anomalies. The research shows that heterogeneous beliefs induce the premium of IPO in the secondary market and moment profits.The evolvement of investors' opinions results in the bubble and crash of Chinese stock market. The fourth chapter explores empirical evidence that inflation illusion and resale option which induced by heterogeneous beliefs provide a story for Chinese stock market speculative bubble. But the evidence suggests that the heterogeneous beliefs may provide a more coherent explanation for the level and the volatility of the bubble of Chinese stock market. And also the heterogeneous beliefs forecast the crash of individual stock price and market price in Chinese stock market as showed in the fifth chapter. The private information of those relatively bearish investors who initially sidelined by the short-sales constrain is more likely to be flushed out through the trading process when the market is falling. Relative to bubble, stock markets more likely melt down. The return will be more negatively skewed conditional on higher heterogeneous beliefs.The main contributions of this paper include: (1) first analysis of Chinese stock price behavior with heterogeneous beliefs theory; (2) new explanation and understanding about Chinese stock market anomalies; (3) first bubble estimation with dynamic residual income valuation model based on the vector-autoregressive and log-linear asset pricing framework and first empirical research of resale option hypothesis in China; (4) analysis of Chinese stock market crash with heterogeneous beliefs theory and give the skewness character of Chinese stock return distribution.