Intertemporal Asset Pricing Theory And Its Applied Research In The Chinese Stock Market

The capital asset pricing model (CAPM) is one of the classical theoretical models in modern financial economics, but recent empirical evidence of the capital asset pricing model is disappointing—the capital asset pricing model fails to explain the cross-sectional variation of asset expected returns. This may be caused by many reasons. One crucial reason of them is that its static specification fails to take into account the effects of time-varying investment opportunity (time-varying risk and time-varying risk premia) set. Intertemporal asset pricing models (IAPM) can remedy this theoretical defect of the capital asset pricing model. Moreover, the intertemporal asset pricing models can also potentially answer what forces determine risk premia and its levels, and account for predictability in asset returns, and characterize the properties of investors' behavior (the investors' properties of risk preference and intertemporal preference). But empirical results supporting the intertemporal asset pricing theory are rarely obtained in developed capital markets. For instance, there does exist the equity premium puzzle, and Euler's Equations are often rejected at conventional significant levels. Then, what is the situation of the intertemporal asset pricing models applied in China's stock market?China's stock market has experienced more than ten years and has reached a certain scale. But unlike investors in American stock market, investors in Chinese stock market didn't get enough rewards for bearing risk. This is because listed companies in China's stock market are of low quality, and investible financial products are rare. Especially since June, 2001, downturn in China's stock market has persisted, and outstanding market value has evaporated, and the investors have suffered lots of losses and have lost their confidence in China's stock market. This leads to a vicious spiral, i.e., downturn in stock market induces investors to lose their confidence, and vice versa. Under this circumstance, what is the investors' behavior (the investors' properties of risk preference and intertemporal preference)? How does...