Market Pricing of Fundamentals at the Shanghai Stock Exchange: Evidence from a Dividend Discount Model with Adaptive Expectations

34 Pages Posted: 2 Mar 2021

See all articles by Mingyang Li

Mingyang Li

Sun Yat-sen University (SYSU) - International School of Business and Finance (ISBE); Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Linlin Niu

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE); Xiamen University - School of Economics

Andrew Pua

Wang Yanan Institute for Studies in Economics

Date Written: December 30, 2020

Abstract

We study market pricing of fundamentals at the Shanghai Stock Exchange, incorporating possible irrational pricing behavior with adaptive expectation. Using panel data of listed stocks to overcome the limited information in aggregate time series data, we estimated key parameters of the price elasticity of dividends and the expectation adjustment based on a linear dynamic panel data model. We use a major subset of stocks with stationary real prices and cash flows and apply methods that correct for incidental parameter bias. The resulting price elasticity of dividends is about 0.46 (0.35) based on annual (quarterly) data, which is sizable given high PD (PE) ratios in the market. Our results imply that slow expectation adjustment contributes to “bubble-like” price patterns. We also show prices significantly react to macro information related to the discount rate, but these effects are very sensitive to the information set used.

Keywords: Stock price determination, Adaptive expectation, Time-varying discount rate, Incidental parameter bias

JEL Classification: G12, C33, C58

Suggested Citation

Li, Mingyang and Niu, Linlin and Pua, Andrew, Market Pricing of Fundamentals at the Shanghai Stock Exchange: Evidence from a Dividend Discount Model with Adaptive Expectations (December 30, 2020). Available at SSRN: https://ssrn.com/abstract=3762516 or http://dx.doi.org/10.2139/ssrn.3762516

Mingyang Li

Sun Yat-sen University (SYSU) - International School of Business and Finance (ISBE) ( email )

Tangjiawan, Zhuhai Campus
Room A449-1, 4th Floor, Haiqin 6th Building
Zhuhai, Guangdong 519082
China

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

Linlin Niu (Contact Author)

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 306, Economics Building
Xiamen, Fujian 361005
China

Xiamen University - School of Economics ( email )

China

Andrew Pua

Wang Yanan Institute for Studies in Economics ( email )

Xiamen, Fujian 361005
China

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