Empirical Research Of Chinese Stock Market Mispricing And Volatility Based On Heterogeneous Beliefs And Inflation Illusion

Since1990, China’s stock market has experienced severe fluctuations foreight times. Big rises and falls in the stock price will affect the decisions ofinvestors and financiers.This article aims to study the impact of inflation illusion and heterogeneo usbeliefs on the mispricing and volatility of Chinese stock market. The article isstructured as following: firstly for the theoretical studies，the article will explainhow heterogeneous beliefs and inflation illusion influence the stock marketmispricing and its volatility, and then the article will run Granger causality test,lastly will build the vectors auto regression model to prove how these two factorsaffect the relative mispricing and volatility.The sample used in this paper is all the constituents of the CSI300Indexdated from the second quarter of2002to the third quarter of2013. It also usesthe vectors auto regression model to examine the relationship between China’sstock market mispricing and volatility and heterogeneous beliefs and inflationillusion from a dynamic point of view. In the article the Granger causality testfinds that inflation illusion is not the Granger cause of the stock marketmispricing but heterogeneous beliefs is the Granger cause of the stock marketmispricing. By using the impulse response functions and variance decompositionfunctions, it also proves that the Granger cause of the stock market mispricing isnot inflation illusion but heterogeneous beliefs and finds that the impact ofinflation illusion on the mispricing is significantly weaker than heterogeneousbeliefs. Further more, using the impulse response function and variancedecomposition analysis, this article proves that inflation illusion has almost noeffect on the volatility of market mispricing but heterogeneous beliefs have astrong impact on the volatility of market mispricing.There are plenty of existing literatures mainly about asset pricing underhomogeneous beliefs conditions. But there are few researches about the effect ofheterogeneous beliefs and inflation illusions on the stock market mispricing andvolatility, especially on the stock market in emerging markets. Thus, with thedevelopment and improvement of China’s capital market, it has great practicalsignificance to study the effect of heterogeneous beliefs and illusions on thestock market mispricing inflation and volatility.