Empirical Analysis Of The Equity Premium Puzzle

Equity premium is a popular financial topic, its research concentrates on two aspects: one is to validate whether equity premium really exists, the other is to explain equity premium from different angles. There is no unified conclusion coming into being whether equity premium really exists in Chinese stock market. On the other hand, the explanation on equity premium mainly centralizes in traditional financial field; there exists no demonstration test using behavioral finance.This paper expatiates the born of equity premium and deduces the capital and assets pricing modal for consumption. We found that the risk obviating coefficient of Chinese investors is far bigger than the upper limit which mehra and Prescott(1985) ratified through integrating the data of Chinese asset stocks listing in shanghai securities exchange market and the calculation of the least standard deviation of stochastic discount factor and risk obviating coefficient. There really exits equity premium in China. On this base, we summarized the foreign demonstrating method.At last, combining the deduction of prospect value by professor Yangchunpeng, we explained the equity premium employing behavioral finance for the first time, adjusting stock yield using risk adjusting coefficient. As a result, as the increasing of risk adjusting coefficient, the equity premium vanishes gradually. When it comes into the level of academia recognition, the investors even express risk-liking, it inosculates with the characters of Chinese stock market which exhibits morbidity and high speculation. The research proves that China should encourage rational investment and enhance the policy leading effect, integrating with the reformation of state-owned system and the information share to improve the circumstance of Chinese stock market.