AN EMPIRICAL ANALYSIS OF THE CHINESE STOCK MARKET: OVERVALUEDIUNDERVALUED

This study examines whether the Chinese stock markets been overvalued using the dividend discount model. We investigate how much have the economic and price-based factors, such as term structure, inflation and price momentum affected the stock market pricing errors. Usingca database of daily dividend based index in China from July 2002 to June 2005, our study shows the stocks were undervalued during the sample period, on average, by approximately 0.09 % and 1 % for Shanghai and Shenzhen composite indexes respectively. The undervaluation can be explained by price momentum and term structure of interest rate. We conclude that the Chinese stock markets do not sufficiently reveal local economic conditions and Chinese investor depend on anecdotal information for momentum profits. 1