Price Delay, Speculative Demand and Stock Returns
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| Title | Price Delay, Speculative Demand and Stock Returns
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| Author | Hu Conghui and Liu Yuzhen |
| Organization | University of International Business and Economics;Peking University |
| Email | conghui_hu@163.com；yjliu@gsm.pku.edu.cn |
| Key Words | Price Delay; Speculative Demand; Stock Return Predictability; Market Frictions |
| Abstract | This paper aims to investigate the impact and its internal mechanisms of various market frictions on stock returns in A share market by introducing price delay, a comprehensive measure for market frictions proposed by Hou and MosKovitz (2005). We find that stocks with stronger price delay are followed by lower subsequent returns and the average return of a hedge portfolio based on price delay is as high as 1.36% per month. This finding not only contrasts with the U.S evidence but is hard to reconcile with classical theories. We propose a new explanation for this phenomenon from the perspective of speculative demand. Slow price reactions to market-wide public information indicates that investors allocate more weights on private information when making decisions, which exacerbates different opinions about stock valuation, stimulates speculative demand, amplifies the value of stock resale options and finally results in the overvaluation of stock prices. Our further evidence confirms that stock with strong price delay share a number of common characteristics with speculative stocks and the predictability of price delay on future stock returns is mainly derived from the components related to speculative features. Our study indicates that unlike the U.S. stock market, the market friction related to speculative demand plays a more important role in Chinese stock market than those related to liquidity and investor recognition. |
| Serial Number | WP931 |
| Time | 2015-10-08 |
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