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Speculative Trading And Stock Prices
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Category : Business » Stock Trading
speculative trading, the size of the non-fundamental component . investors are new to stock trading, and are more likely to be subject to behavioral biases .
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In this paper we use data from China’s stock markets to analyze non-fundamental components in stock prices. During the period 1993-2000, several dozen Chinese firms offered two classes of shares: class A, which could only be held by domestic investors, and class B, which could only be traded by foreigners. Despite their identical rights, A- share prices were on average 400% higher than the corresponding B shares. We use a model of investor overconfidence (Scheinkman and Xiong (2003)) that produces correlations among prices, turnover, and volatility, to explain this premium. By adopting a panel regression method, we find that the turnover rate of A shares is able to explain 20% of the cross-sectional variation in A-B share premium. We also conduct various specification analyses, and examine the relation between float, turnover rate, and volatility.
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