We explore the value premium in the Chinese stock market and how to exploit it using a new investor sentiment index. We extensively discuss the performance of BM, CFP, EP and SP factors in China. Consistent with the experience of other countries, BM generates more of a value premium in small cap performance, while EP generates more of a value premium in large cap stocks in the Chinese stock market. First, we construct a novel value factor based on BM, EP and SP. We obtain the loading weights of each value indicator in each market value by partial least squares. The novel value factor outperformed all other value factors. Second, we explore the relationship between value premium and investor sentiment. Different from evidence from most developed countries, the value stocks perform better than growth stocks in the bull market in China. Our evidence suggests investing in value stocks can get more profit when market sentiment is low.

This paper examines the impact of idiosyncratic risk on the cross-section of weekly stock returns from 1963 to 2006. I use an exponential GARCH model to forecast expected idiosyncratic volatility and employ a combination of the size e§ect, value premium, return momentum and short-term reversal to measure relative mispricing. I ?nd that stock returns monotonically increase in idiosyncratic risk for relatively undervalued stocks and monotonically decrease in idiosyncratic risk for relatively overvalued stocks. This phenomenon is robust to various subsamples and industries, and cannot be explained by risk factors or ?rm characteristics. Further, transaction costs, short-sale constraints and information uncertainty cannot account for the role of idiosyncratic risk. Overall, these ?ndings are consistent with the limits of arbitrage arguments and demonstrate the importance of idiosyncratic risk as an arbitrage cost.

This paper examines the impact of idiosyncratic risk on the cross-section of weekly stock returns from 1963 to 2006. I use an exponential GARCH model to forecast expected idiosyncratic volatility and employ a combination of the size effect, value premium, return momentum and short-term reversal to measure relative mispricing. I ?find that stock returns monotonically increase in idiosyncratic risk for relatively undervalued stocks and monotonically decrease in idiosyncratic risk for relatively overvalued stocks. This phenomenon is robust to various subsamples and industries, and cannot be explained by risk factors or ?rm characteristics. Further, transaction costs, short-sale constraints and information uncertainty cannot account for the role of idiosyncratic risk. Overall, these ?findings are consistent with the limits of arbitrage arguments and demonstrate the importance of idiosyncratic risk as an arbitrage cost.