[April 23, 2014] |
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NYU Stern Professors Jennifer Carpenter and Robert Whitelaw Analyze the Real Value of China's Stock Market and Find "Casino" Reputation Does Not Apply
NEW YORK --(Business Wire)--
In new
research that analyzes data from China's stock market from 1995 to
2012, NYU Stern Professors Jennifer Carpenter and Robert Whitelaw, along
with undergraduate student Fangzhou Lu, find that despite its reputation
as a "casino," China's stock market has functioned well by several
measures: 1) the prices of stocks in China are as informative about
future earnings as those in the US; and 2) Chinese investors price stock
characteristics the same way as investors in developed markets. In
addition, they find that the Chinese stock market exhibits low
correlation with other equity markets, and offers high alphas for US and
global investors who can access them.
Key insights from the paper include:
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The signals carried in stck prices in China are as informative about
future profits as those in the US and have improved since the reforms
of 2001.
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The efficiency of corporate investment is highly correlated with stock
price informativeness over time.
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Also, contrary to the "casino theory," though it is a segmented
(closed) market, China's stocks exhibit pricing patterns that are
similar to those in developed markets. Chinese investors pay up for
liquidity, long shots, growth stocks and low systematic risk (i.e,
beta).
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Contrary to perception, the Chinese stock market has performed
surprisingly well, especially its small and medium enterprises.
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The low correlation of the Chinese stock market with other markets
creates investing opportunities (high alphas) for US and global
institutions that can access them.
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Furthermore, because its closed (segmented) market raises capital
costs for Chinese firms, market liberalization would likely lower
China's cost of capital and fuel economic growth
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Continued legal and market reforms and integration with global markets
would further empower the Chinese market to attract capital, allocate
it efficiently, and support economic growth worldwide.
The paper "The
Real Value of China's Stock Market" will be presented on April 26 at
the National Bureau of Economic Research's Chinese Economy Meeting in
Cambridge, MA.
To speak with Professor Carpenter or Professor Whitelaw, please contact
Joanne Hvala or Jessica Neville in NYU Stern's Office of Public Affairs
at 212-998-0995 or [email protected]
or [email protected]
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