The Equity Premium In China:Perspective Based On Analysis Of Behavioral Finance

In the research of the return between stock market and the risk free asset in the pastyears, we will find that the return of stock was much higher. This is called equitypremium. When the excess return exceeds the maximum value in theory, the financialmodel can’t explain it and a puzzle appears. The equity premium exists in manycountries’ stock market, such as America, France, England and Japan. For China, itdeserves special attention. In the past, we often assumed the investors were same. But theconclusion we got was not accurate. In the article, we allow the investors are different.And it discusses the investors in different loss aversion level how to impact the equitypremium when they make a decision in different reference points.First, this paper introduce two concepts of decision-making: loss aversion andmental accounting. Then it deduces the value function based on prospect theory. Next,it’ll analyse the condition of China. In this part, it divides all years into two parts beforeand after the reform of stock structure. The empirical results show that the equitypremium in Chinese market is obvious and rolling. All of these suggests Chinese marketisn’t enough mature.The rolling due to the lack of value main center, and the investorsare myopic loss aversion.Though to some extent, this paper can explain the equity premium and satisfy thepractical cases. There is small accident when dealing with the model. And the model isnot good enough. In future, exploring the model in more depth is research fields.