Analysis On Equity Premium Puzzle Of China's Stock Market

The yield and volatility of China's stock market is always a hot topic. People would like to put their capital to stock market and bear the risk to achieve excess return. In CAPM, equity premium is defined as the excess of average stock return over risk-free rate. But under the framework of economics theory, there is a reasonable bound of the equity premium, so when the actual equity premium has exceeded the maximum that the theory can support, there come a"puzzle"that can not be explained. The volatility of China's stock market is very large since the foundation of it. Is the equity premium in the reasonable bound of the theory? Does the equity premium puzzle exist in China?The analysis of equity premium puzzle relates to the estimation of the key parameter of the classic model. The paper take the actual return data of China's stock market, and use the GMM which has often been used to estimate non-linear model, to estimate related risk aversion coefficient and time preference coefficient, and to see if it is in the bound of the theory. We use whole sample period 1991-2007 and its division, to compare equity premium situation and parameter. The empirical result shows that the"equity premium puzzle"does not exist in China, and the results changes much in every sample period. The paper emphasizes on stating the classic model and estimate its parameter, not try to explain or solve the equity premium puzzle through other theories. As the development of domestic research, I think there will be more and more related literature and solutions.