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Heterogeneous Beliefs, a Short-Sale Restriction, and the Cross Section of Stock Returns: An Evidence from China

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  • Shin S. Ikeda

    (National Graduate Institute for Policy Studies)

  • Yan Zhang

    (National Graduate Institute for Policy Studies)

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    Abstract

    We find a negative cross-sectional relation between heterogeneous beliefs and future stock returns in China, where short sale is prohibited in our sample period. Compared to other empirical works, which often be done in a market without short sale prohibition, we obtain this strong negative results after controlling several characteristics of stocks, such as size, leverage, book to market ratio and momentum. This negative relationship supports theoretical conjecture on heterogeneous beliefs (Miller(1977)). Our heterogeneous beliefs proxy is unexplained turnover, which is turnover of individual stocks adjusted by market turnover and its momentum. We also control the liquidity and idiosyncratic uncertainty in the robust test. These two factors are often attributed to the reason of the negative relation between turnover and future returns.

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    Bibliographic Info

    Paper provided by National Graduate Institute for Policy Studies in its series GRIPS Discussion Papers with number 12-12.

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    Length: 17 pages
    Date of creation: Oct 2012
    Date of revision:
    Handle: RePEc:ngi:dpaper:12-12

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    1. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, American Finance Association, vol. 32(4), pages 1151-68, September.
    2. Jérôme B. Detemple & Shashidhar Murthy, 1997. "Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints," CIRANO Working Papers, CIRANO 97s-12, CIRANO.
    3. Hong, Harrison & Stein, Jeremy, 2007. "Disagreement and the Stock Market," Scholarly Articles 2894690, Harvard University Department of Economics.
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    5. Boehme, Rodney D. & Danielsen, Bartley R. & Sorescu, Sorin M., 2006. "Short-Sale Constraints, Differences of Opinion, and Overvaluation," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 41(02), pages 455-487, June.
    6. Harrison Hong & Jose Scheinkman & Wei Xiong, 2005. "Asset Float and Speculative Bubbles," NBER Working Papers 11367, National Bureau of Economic Research, Inc.
    7. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 427-65, June.
    8. Detemple Jerome & Murthy Shashidhar, 1994. "Intertemporal Asset Pricing with Heterogeneous Beliefs," Journal of Economic Theory, Elsevier, Elsevier, vol. 62(2), pages 294-320, April.
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    10. Jon A. Garfinkel & Jonathan Sokobin, 2006. "Volume, Opinion Divergence, and Returns: A Study of Post-Earnings Announcement Drift," Journal of Accounting Research, Wiley Blackwell, Wiley Blackwell, vol. 44(1), pages 85-112, 03.
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    12. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(2-3), pages 307-339.
    13. Evan W. Anderson & Eric Ghysels & Jennifer L. Juergens, 2005. "Do Heterogeneous Beliefs Matter for Asset Pricing?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(3), pages 875-924.
    14. Charles M.C. Lee & Bhaskaran Swaminathan, 2000. "Price Momentum and Trading Volume," Journal of Finance, American Finance Association, American Finance Association, vol. 55(5), pages 2017-2069, October.
    15. Doukas, John A. & Kim, Chansog (Francis) & Pantzalis, Christos, 2006. "Divergence of Opinion and Equity Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 41(03), pages 573-606, September.
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