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Empirical Study on Value Investment in China’s Stock Market

Author: SongYanTao
Tutor: ZhengPing
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: Value investing Excess returns Capital Asset Pricing Model Overreaction
CLC: F224
Type: Master's thesis
Year: 2010
Downloads: 410
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Abstract

According to the scholars at home and abroad for the analysis of the development of finance, the evolution of finance after three stages: the traditional finance, modern finance and emerging finance. Traditional finance as a symbol of the birth of Benjamin Graham and David Dodd classics published in 1934 the book \analysis to determine the intrinsic value of the listed companies, in order to make investment decisions. The traditional financial theory is the basis of the value of the investment. The birth of the modern financial theory as a symbol of papers published in 1952 to Markowitz portfolio selection \evaluation of the empirical work, \Modern financial theory In an efficient market, the price of securities can be quickly and accurately reflect all market information, any investment strategy is not to give investors excess returns. The emerging Finance is behavioral finance theory, the theory to psychology, the psychology of human decision-making research as a starting point to the actual decision-making psychological research investors irrational decisions on changes in securities prices. It presents investors are not assumptions, such as the efficient market theory is completely rational, but limited rational investor decision-making by a variety of factors both inside and outside the market (including itself). The theory is able to explain a lot of modern financial theory can not explain the reality of the problem, and opens up new roads for the development of finance. The theoretical point of view, although there are differences, but one thing is sure: in a mature, healthy and rational stock market, the stock price should be the intrinsic value of the stock performance of a high degree of consistency, the price can reflect changes in the value. Based on the value of the investment strategy selected stock, has a higher intrinsic value and growth, the long-term rate of return should be higher than other stocks. Many empirical studies abroad by historical data developed securities markets analysis shows that most cases the value of the investment can obtain excess returns. Over the years, China's securities market as one of the the world's most important emerging stock markets, the overall performance fluctuations, not rational investment philosophy, the prevalence of speculation. In view of this, trying to theoretical analysis and empirical analysis of two aspects to study the theory of value investing is appropriate for China's securities market is able to bring the excess income, if you can bring excess return, then what is the reason. In the second chapter, the author first overview of the connotation of the theory of value investing, which laid the foundation for subsequent theoretical and empirical analysis. Value investment philosophy is widely disseminated in the world, but do not have a unified exact definition. Related literature, summed up the value of the investment of several features: 1. Premise of value investing is the price of the stock around the fluctuations in the value; 2. Looking for a price lower than the value of the stock, with a large margin of safety Buy; 3 buy stocks, if its price does not exceed the reasonable value then it insisted on holding; (4) the value of the stock is based primarily on the value of its assets, the value of profitability and growth value three aspects to determine; 5. The value of the investment need to build a portfolio to reduce investment risk. Explore the meaning of the value of the investment, the paper reviews the study of the performance of the value of the investment strategy abroad. These documents can be found: In most cases the value of the investment strategy beyond the market rate of return. However, foreign scholars on the interpretation of the value investing excess returns is not consistent. Fama and French risk change doctrine \The other is a De Bondt and Thaler; Lakonishok, Shleifer and Vishny investors represented by irrational behavior and market arbitrage limitations. This interpretation is a fundamental denial of the validity of the stock market, that explanation is not given to risk compensation is from an investor's behavioral characteristics to explain, belonging to the category of behavioral finance. Next, in the fourth chapter of this paper, through theoretical analysis from various angles of the stock market value of investment theory is applicable to our country. Although China's securities market established a later time, but a wide variety of ever-popular investment philosophy. Only after 1996, China's stock market situation, the stock market has experienced from advocating merit to prefer restructuring, sought after blue-chip keen small cap, from the equilibrium position to the science and technology first, important changes from the concept of speculation to hold high value investment flags . September 4, 2005, the China Securities Regulatory Commission to develop a \process. The split share structure reform problems, large shareholders and the interests of the holders of tradable shares pattern tends to be consistent, the major shareholders of listed companies will be more concerned about the stock price of the secondary market, to actively improve the corporate governance structure, strengthen the company's management, enhance the company's results of operations. To enhance the quality of listed companies as a whole, the stock market value of the investment will be reflected more reasonable stock valuations increase the confidence of investors in the stock market, individual investors and institutional investors with greater enthusiasm to participate in China's securities market. Completed with the victory of the split share structure reform, the strengthening of the securities market regulation, institutional investors increased proportion of value investment philosophy is gaining in popularity. Began in the context of continuous improvement objective conditions, the value of the investment strategy for China's stock market. According to the concept of value investing, people used to have a high book value / market value (B / M, can also be used B / P instead), earnings / stock price (E / P), dividend / stock price (D / P referred to as value stocks) or cash flow / stock price (C / P) ratio of stock corresponding to these indicators lower rates of various stocks referred to as non-value shares. In this paper, the actual study, select B / M, E / P two financial indicators, drawing on the LSV portfolio construction method to specific financial indicators B / M, E / P of the size of China's stock market 1999-2005 all A shares in the years to sort before 50 and after 50 were divided into value stocks and non-value stocks, and then test the value of the share portfolio and non-portfolio of value stocks in the three years after the formation of the non-normal income status. After analysis of the results, the following conclusions: the value of the investment strategy for investors in the Chinese stock market excess returns. Subsequently, we calculated all listed companies in the decade of 1999 to 2008 the average annual yield: continued high rate of return must study found that middle-aged of 10 years the highest rate of return of 50 shares of listed companies have good profitability support; same time, the value of the investment also need to grasp market trends, need to wait for the target stock price is lower than its value, margin of safety large enough to buy. Obtain excess returns conclusions of value investment strategy, using the capital asset pricing model (CAPM) and overreact to obtain excess returns on the value of the investment strategy, the theory of the empirical analysis. First, the authors identify each portfolio corresponds to the market rate of return and the risk-free rate of return, then the relevant data based on the CAPM model regression. The regression results show that the B value of a portfolio of value stocks is greater than the combination of non-value shares, which could explain the combination of value stocks bear a larger market risk. Followed by reversal theory for the relevant sample data have been tested. First, the authors calculated that each group portfolio to build non-normal rate of return in the first three years of comparative analysis, and then three years to build a non-normal rate of return. Results show that a combination of the value of shares in the three years after the formation of excess returns in the formation of a three-year income significantly lower than market income, a combination of non-value shares the opposite, suggesting that the combination of value stocks to obtain excess returns can be over- response theory to explain.

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