Studies On The Approach Of Estimating Chinese Market Risk Premium

MRP is the one of the important factors in CAPM, which is regarded as the core modelin the theory of Finance. The value of MRP affects the value of CAPM, and impacts oninvestment decision-making. However, MRP has not been assured in whether the domestic orforeign researchers. For example, a study in Fernandez (2011) investigating various MRPdifferent users adopted in2010shows that the average values used by professors, analysts andcompanies are respectively6.0%,5.1%and5.3%. Another study in Fernandez (2012)researching different MPR used by scholars from82countries tells that the MRP valueadopted by Chinese scholars is between3.9%and30.0%, whose degree of dispersion issecond to Brazil. From these results we can conclude that the MRP is so differently measuredby scholars. Consequently, for the sake of making performance evaluation, value assessmentand investment decision, it’s extremely useful to choose an effective and suitable method toestimate the MRP of China.In the essay, the author first explore the main factors make the value of MRP is sodifferent; Then through the method of investigating statistics and interviewing to researchrespectively the risk-free rate in the theoretical study and pragmatically operating, andthrough analyzing the alternative assets with concerning the characteristics of risk-free asserts;Meanwhile, through the comparative analysis of four methods to choose the suitable methodto estimate MRP; Finally, based on the logical steps of improved method to estimate MRP ofChina.In the time of choosing the risk-free, through analyzing the alternative assets withconcerning the characteristics of risk-free asserts, one-year book-entry T-bond can be used asthe representative of risk-free asserts in China. On the basis of comparing the long-term returnwith short-term return of nation bond, the study regards the yield to maturity of one-yearbook-entry T-bond as the risk-free rate which is3.60%. In the time of choosing the method toestimate MRP, the results conclude the questionnaire method and the horizontal adjustmentmethod have not the good applicability; the historical method and the perspective method canbe used with improved. So the author modifies the period of the historical method, and thestock index of the perspective method, concludes the logical steps. At last, the author uses twoimproved methods to estimate that the MRP are6.09%and7.07%. By analyzing theinfluenced factors of MRP, the author ultimately determines that estimated results are notaffected.Through the analysis of comparing the two methods’ implicated process, the author thinks that under the condition of China’s stock market the two methods complement eachother and the estimated results also complement each other. With the continuous developmentof the stock market and the continuous improvement of the dividend policy, the result of theprospective method is more reasonable to provide the MRP for the investors.