Chinese Stock Market Equity Premium

As the weatherglass of Chinese economy, stock market, is very important. The alteration of the stock market will directly touch the development of the nation's economy. Equity risk premium is an important variable in stock market. There are some uses when we studying the equity risk premium, such as, 1) It can instruct the investor to distribute their funds into stock, fix income bond and other asset. 2) It is important in the judge of how to use the hospitalization insurance fund and social insurance fund. 3) It plays an important role in adjusting different complications. 4) It can decide the level of stock price. This paper will study the Chinese equity risk premium. Firstly, I will introduce and analyse the theories and studies about this problem abroad. By introducing, we know that the theories abroad can be divided into two kinds: 1) we can estimate the outstanding achievement of stock market by studying history data. 2) we can do it by applying the DCF model and earning income scheme. Secondly, whereas these theories are applied very well abroad, I will discuss the practicability of these theories when we use in Chinese stock market, then I will draw a conclusion that there is some localization when these theories are applied in Chinese stock market. Finally, by studying the Markov process, we can see the equity risk premium data which are derived from Chinese stock market have characteristic of Markov process, so I will establish the model based on the Markov process and make a short time forecast about Chinese equity risk premium.When forecasting, I have employ Markov process twice. For the first time, I wipe off some special points that will not appear on the stock market usually. Based on the conclusion of the first time's studying, I carry through the Markov process again. Then there will be some conclusions about my study as followed: 1) It is no use to just copy the theories abroad, for the companies in China aredifferent from those abroad. 2) The method of estimating the equity risk premium through the history data could work out the average history equity risk premium, but it can't explain the characteristic that the equity risk premium vibrate with time.3) By studying, we know that the level of equity risk premium in Chinese stock market about one week is positive usually. Even if it was negative sometime, it will become positive in several weeks. Due to the yield change of national debt market is relatively stable, we find that the yield of stock market directly decides the level of equity risk premium. 4) This model is like a technique analysis, the investor can master the pulse easily by applying this model.Liwei (Finance) Directed by Prof. Yang Chunpeng...