The general financial theory predicts a carbon premium, as brown stocks bear greater uncertainty under climate transition. However, a contrary green premium has been identified in China, as evidenced by the return spread between green and brown sectors. The aggregated climate transition sentiment, measured from news data using a large language model, explains 12%-33% of the variability in the anomalous alpha. This factor intensifies after China announced its national commitments. The sentiment-driven green premium is attributed to speculative trading by retail investors targeting green “concept stocks.” Additionally, the discussion highlights the advantages of large language models over lexicon-based sentiment analysis.

The Chinese earnings yield differential relative to the U.S. switches from negative to positive around 2009, with the aggregate variation masking substantial cross-sector variation. Changes in sectoral composition and (changing) growth expectations are not important determinants of the variation in China-U.S. valuation differentials. Instead, changes in ownership structure, and most importantly cross-sectional and temporal variation in financial openness, are the key contributors. In addition, we show that IPOs in the banking sector and its internationalization played a critical role in the (relative) valuation change.

Prior to April 2005, only one third of the shares issued by exchange-listed companies in China are publicly tradable. The other two thirds, mainly owned by Chinese government agencies or government-linked enterprises, are prohibited from public trading. On April 29, 2005, the Chinese Securities Regulatory Committee announced a reform plan that aims to abolish the split-share structure by converting all non-tradable shares to be publicly tradable. We investigate the consequences of this unique event and shed light on how increase in share float affects liquidity, speculation and stock prices. Firstly, we find that tradable A-shares command a 60% price premium on average over non-tradable A-shares and this price premium contains both liquidity and speculation components. Secondly, the share structure reform increases share turnover and dampens speculative trading. Relative to control firms, share turnover of restructured firms increases substantially after the reform, with the largest increase (107 %) in firms that had low liquidity and low speculative trading before the reform. In contrast. there is no increase in share turnover of firms that had high liquidity and high speculative trading. Thirdly. stock prices drop substantially on the day when the supply of tradable shares increases due to the reform. Moreover. the higher increase in the supply of tradable A-shares. the larger drop in the stock price. This indicates that the short-term demand curve is downward-sloping. Fourthly. despite the fall in stock prices. shareholder wealth increases by 15% on average. We find that the largest price drop and the smallest wealth gain occurs in firms with the highest speculative trading before the reform. which suggests that share structure reform dampens speculative trading in Chinese market. Lastly, split share reform also benefits the B-share market despite that the reform involves only A shares: B-share turnover increases after the reform and the well-known B share price discount narrows substantially .

Motivated by the behavior of asset prices, trading volume, and price volatility during episodes of asset price bubbles, we present a continuous-time equilibrium model in which overconfidence generates disagreements among agents regarding asset fundamentals. With shortsale constraints, an asset buyer acquires an option to sell the asset to other agents when those agents have more optimistic beliefs. As in a paper by Harrison and Kreps, agents pay prices that exceed their own valuation of future dividends because they believe that in the future they will find a buyer willing to pay even more. This causes a significant bubble component in asset prices even when small differences of beliefs are sufficient to generate a trade. In equilibrium, bubbles are accompanied by large trading volume and high price volatility. Our analysis shows that while Tobin’s tax can substantially reduce speculative trading when transaction costs are small, it has only a limited impact on the size of the bubble or on price volatility.

Motivated by the behavior of internet stock prices in 1998-2000, we present a continuous time equilibrium model of bubbles where overconfidence generates disagreements among agents regarding asset fundamentals. With shortsale constraints, an asset owner has an option to sell the asset to other agents who have more optimistic beliefs. This re-sale option has a recursive structure, that is, a buyer of the asset gets the option to resell it. This causes a significant bubble component in asset prices even when small dierences of beliefs are sucient to generate a trade. The model generates prices that are above fundamentals, excessive trading, excess volatility, and predictable returns. However, our analysis shows that while Tobin’s tax can substantially reduce speculative trading when transaction costs are small, it has only a limited impact on the size of the bubble or on price volatility. We give an example where the price of a subsidiary is larger than its parent firm. Finally, we show how overconfidence can justify the use of corporate strategies that would not be rewarding in a “rational” environment.