Chinese Stock Mispricing: Money Illusion Or Resale Option?

In market economy, development of economy is always realized in the cyclical fluctuations. As a barometer of economic development, the stock market is also fluctuant. Especially for Chinese stock market,the price of stock has huge volatility. According to money illusion hypothesis and resale option hypothesis, by means of quantile regression, this paper examines if these two hypotheses are factors that lead to Chinese stock mispricing.We first examine money illusion hypothesis, which contends that investors suffer from an incorrect assessment of expected inflation that causes them to discount real dividends by nominal interest rates. Investors fail to recognize that an increase in expected inflation also leads to an increase in the nominal dividend-growth rate. Accordingly, this error results in an inflation induced mispricing in assets such that prices are above their fundamental value when expected inflation is low and vice versa. We adopt quantile regression model in chapter4and we find that inflation carries the negative sign with mispricing which is consistent with money illusion theory. Besides, according to different quantiles, coefficients of inflation fluctuate. It suggests that effects of inflation to mispricing are not all the same, which can only be obtained by empirical models.In Chinese stock market, for the investors are mainly private and the fluidity of stock information is poor, heterogenous beliefs take shape. And what’s worse,there is short sale constraint in Chinese stock market. The second study point of this paper is resale option hypothesis. When inverstors buy stock,they sometimes are willing to pay over the stock’s fundamental price. Because they believe that they will find someone who is more optimistic inverstors will buy the stock in a much higher price. This action causes mispricing in the stock market. But with information flowing, stock prices crash. We find that stock mispricing is positively related to resale option and its effects change according to different quantiles.Besides, the fifth chapter makes use of empirical evidence that money illusion hypothesis has no discernible effect on mispricing volatility, while resale option is positively related to mispricing volatility. Thus, the differential influence on mispricing volatility suggests that the resale option hypothesis provide a more coherent explanation for stock mispricing.The main contributions of this paper include:(1)first mispricing estimation with quantile regression which is still leading in financial area;(2)not only analysis of the level of Chinese stock mispricing, but analysis of its volatility.