This study investigates the source of mispricing and its volatility in the Chinese stock market. In line with U.S. studies, the findings show that heterogeneous beliefs among investors and investors’ inflation illusions simultaneously lead to mispricing. However, at the market level, the volatility of Chinese stock mispricing can be hardly explained by either investors’ heterogeneous beliefs or investors inflation illusions. Furthermore, the empirical results show that inflation illusion has a distinct influence on state-controlled and non-state-controlled industries. Government intervention can decrease upward mispricing, but aggravate downward mispricing. The mispricing level of state-controlled industries is more sensitive to changes in heterogeneous beliefs relative to that of non-state-controlled industries. Inflation illusion is the driving force behind mispricing volatility in the state-controlled industry sample, but does not affect the non-state-controlled group.
|Emerging Markets Finance and Trade
|Afsendt - 15. sep. 2019