The Empirical Test Of The Capital Asset Pricing Model Based On Habit-formation In China

The Consumption-based Capital Asset Pricing Model (CCAPM) has been developed for almost 20 years. It has made great progress since it was first proposed. Recently, The research on the CCAPM by introducing habit formation to explain the equity premium is very active. The article studied the CCAPM to solve the equity premium through the development of consumer utility function. The focus is on the habit formation. There are endogenous and exogenous habit formation and There exist corresponded classical pricing models. And the models can explain the equity premium phenomenon in some extent. So, Maybe it will be better to combine the endogenous and exogenous habit formation with a ratio. Simultaneously, The behavioral finance has been popular nowadays. The prospect theory is one of the popular theories. It can capture the behavior of the human. Beginning with the phenomenon of people be more sensitive to loss to study the equity premium. Though the result is not very good, it can explain the equity premium in some extent. Based on the existing situation.The article appoints the Mao-Wei Hung & Jr-Yan Wang's asset pricing model which is combined with habit formation and the prospect theory.The article tries to make use of the Chinese data to testify the applicability of the model in china. And take the model to picture the features of our Chinese investors,to explain the equity premium in our country and test whether our county exist the equity premium puzzle.Except the applicability of the model, The article takes the model to testify whether it is appropriate to the eastern,central and western part of our country. The model integrates the situations of consumption larger and smaller than habit.The utility function of the model is exponential function rather than the usual power function. The model takes advantage of the risk aversion coefficient and the loss aversion coefficient to explain the extent of people's risk aversion. Comparing with the traditional model, the model has another more coefficient to measure the risk. The estimation of the model is the Generalized Method of Moments (GMM).The method is appropriate to both single and simultaneous equations in linear and nonlinear form. The main idea of GMM is to choose suitable parameters to achieve the aim of satisfying the theoretical relationship. The method use sample conditions to take the place of theoretical relationship, the estimator which can make the weighted distance of the theoretical relationship and sample conditions to be the minimum distance is the parameter's GMM estimator. One of the advantages of the method is that it doesn't need the residual's distribution. The GMM estimator is steady.The empirical results show that the habit formation is a role in the asset pricing model. And when the ratio of endogenous habit is higher, the result is more ideal.And the results show that the use of the model in china is successful and effective. It can get low risk aversion coefficient to explain the equity premium in our country. It shows that our country does not exist the equity premium puzzle. The result is corresponded with the recent development of our country. The development make our country's high savings,low consumption phenomenon has some change, prone to low savings,high consumption, and slowly move closer to the developed countries. The empirical results illustrate the features of our country's investors. They prone to current consumption and behave risk aversion in the bull market. In the bear market, They prone to inter temporal consumption and behave risk loving. The model is applied to testify the central,eastern and western part of our country and we carry on comparative analysis. The result shows that the zoning of our country has some effect on the empirical result. The investors in the central and western part of our country are more risk loving than investors in the eastern part. There exist regional differences. The stock market is a barometer of the economy, To some extent, the results reflect the fact of the economic differences in the central,eastern and western part of china.Generally speaking, the model combined with habit formation and prospect theory for asset pricing is applicable in china.