Research on the Amplification Effect of Trading Volume on Mispricing in the Chinese A-share Market

Abstract

 With the continuous growth of the economy, the residents' demand for preserving and appreciating family wealth has gradually become prominent. The stock market has become the primary choice for investors pursuing asset appreciation. Investors expect to achieve higher returns through scientific methods, and factor models, as well as mispricing, have become the focus of attention, aiming to obtain excess returns through market anomalies. However, with technological advances, the complexity of the market is increasing, making it increasingly difficult to find excess returns through pricing models. As trading volume is the most fundamental indicator in the market, containing many effective market insights and capturing investor disagreements, it is necessary to delve into the role of trading volume in the impact of mispricing on expected returns. This research selects all A-share stocks from 2000 to 2022, excluding the Sci-Tech Innovation Board, measuring mispricing through the anomaly in pricing models. Then, by independently double-sorting mispricing and trading volume into 5x5 portfolios, constructing market-weighted investment portfolios, and holding for one month, we observe the predictive ability of mispricing for future returns at different levels of trading volume. The results reveal that in stocks with high trading volume, the predictive ability of mispricing is stronger. Specifically, in stocks with high trading volume, the difference in future returns between the undervalued stock portfolio and the overvalued stock portfolio is greater than the difference in returns in low trading volume stocks. In other words, trading volume plays a moderating role in the impact of mispricing on expected returns, enhancing the predictive ability of mispricing on returns.