Asset pricing and nominal price illusion in China

Based on the Fama's three-factor model (FF3) and five-factor model (FF5), this study adds a low-priced stock premium factor LPP, and then builds a new four-factor and six-factor model respectively to examine the impact of low-price premium (LPP) on the pricing of China's stock market. The research indicates that LPP is a reliable and effective pricing component in China's A-share market, and it may be used as a systematic factor in the Chinese stock market's asset pricing model. The LPP factor shows a strong negative association with stock excess returns. And the inclusion of the LPP in the FF3 and FF5 still passes the robustness test. Meanwhile, the six-factor model created by combining the LPP factor with the FF5 could explain Chinese stock market pricing better.

Pujian Yang, Liu Yang