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Betting against low nominal prices: Evidence from China

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  • Zhang, Bing

Abstract

We offer evidence of a positive low-nominal-price return premium in China’s stock markets. We explain this by using Campbell and Vuolteenaho’s (2004) cash-flow and discount-rate betas. Low-priced stocks have high cash-flow that delivers high expected returns. The negative low-nominal-price return premium is negative in US markets and this discrepancy is attributed to reverse ranking of cash-flow betas for low-priced stocks. We find that high cash-flow risk for low-priced (high-priced) stocks in China (US) is associated with low price informativeness and analyst attention; the discrepancy of cash-flow betas in US and China is driven by book-to-market ratios and idiosyncratic volatility.

Suggested Citation

  • Zhang, Bing, 2023. "Betting against low nominal prices: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 476-500.
    • Handle: RePEc:eee:reveco:v:88:y:2023:i:c:p:476-500
    DOI: 10.1016/j.iref.2023.06.017
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    References listed on IDEAS

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    1. Mike Qinghao Mao & K. C. John Wei, 2016. "Cash-Flow News and the Investment Effect in the Cross Section of Stock Returns," Management Science, INFORMS, vol. 62(9), pages 2504-2519, September.
    2. John Y. Campbell & Christopher Polk & Tuomo Vuolteenaho, 2010. "Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 305-344, January.
    3. Berk, Jonathan B, 1995. "A Critique of Size-Related Anomalies," The Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 275-286.
    4. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    5. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
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    Cited by:

    1. Jia, Yuecheng & Xu, Zheng & Yan, Shu & Zhang, Runyu, 2024. "Nominal price illusion, return skewness, and momentum," Finance Research Letters, Elsevier, vol. 67(PB).

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    More about this item

    Keywords

    China’s stock markets; Low-nominal-price return premium; Cash-flow beta; Discount-rate beta; Analyst forecasts; Price informativeness;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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