Noise and expected return in Chinese A-share stock market

Abstract

Noise is defined as the deviation of a stock’s current price from its fundamental value. According to recent studies, the noise not only influences stock returns significantly (Arnott, etc., 2007), but gives rise to firm size, book-to-market equity and momentum effects to some extent (Barber, etc., 2006, etc.). This paper seeks to determine whether a noise risk premium exists in the Chinese stock market after adjusting for market premium, firm size, book-tomarket equity and momentum effects. Our finding suggests that there is no obvious causal relation of noise to firm size effect, bookto- market equity effect and momentum effect respectively. However, noise itself can capture a portion of variations in stock returns which market premium, size, book-to-market equity and momentum factors cannot.