An Empirical Study On The Impact Of China’s Macro-economic Volatility On The Stock Market Risk Premium

The stock market’s main purpose is to reduce the cost of investment andfinancing, provide facilitate for investment and financing and serve the real economy.And at the same time, the stock market can reflect the operation of the real economyat some extent. The stock market and the economy, as a whole, have a mutualinfluence and mutual restriction relationship. Our country’s stock market has alwaysbeen volatile and high risk, which needs more earnings to compensate. Largefluctuations and high risk, so to speak, is one of the significant characteristics of ourstock market, so what is the cause of the high risk? How is risk premium of our stockmarket? Whether China’s macroeconomic volatility can well explain the risk premiumof the stock market? Does our stock market’s risk premium contain themacroeconomic risk? Does our stock market have the ability to forecastmacroeconomic? What is the relationship between China’s real economy and virtualeconomy? Around these five questions, this thesis studied the relationship between therisk premium of China’s stock market and macroeconomic variables, trying to explainour stock market’s risk premium from a macroeconomic perspective.Based on the review of the relevant literature, this thesis explained the cause ofour stock market’s risk premium from three aspects. These three aspects, that is, thestock market risk, investors are risk-averse and investors need to be risk compensation.With the basic theory of the relationship between macroeconomic and stock market,we also illustrate the transmission mechanism that how the macroeconomicfluctuations affect the stock market. First of all, this thesis used stochastic discountfactor asset pricing model, which is based on macroeconomic factors, to build themathematical economic model on macroeconomic fluctuation and the stock marketrisk premium. Then, according to the mathematical economic model, the thesiscarried on the empirical analysis. In the empirical analysis, we used multivariateGARCH model to calculate the time-varying covariance matrix, and then used theweighted least squares method to do the regression analysis. In addition, in theempirical, this thesis also compared notes with using the model if it containsinternational impact factors. The empirical results show that international economicfactors significantly influence the risk premium on the stock market in China. And atthe same time, the results also proved the rationality of the mathematical economicmodel built in this thesis.The conclusion of the empirical analysis basically has the following four points:1. Our stock market yields are mixed, but the predictability of the monthly rate ofreturn is higher than the U.S. stock market.2. Macroeconomic volatility primarilythrough three aspects to affect the stock market risk premium. They are the yield ofrelated investment, operation performance of listed companies and investors’ expect.3. The macroeconomic volatility has significant impact on our stock market’s risk premium.4. China’s economy output and the volatility of the price level bringnegative impact on China’s stock market risk premium. And the fluctuation of ourbroad money supply has positive impact on stock market risk premium. What’s more,the stock market earnings volatility of the U.S. also brings positive impact on China’sstock market risk premium. Based on the above conclusions, the thesis not only gavesuggestions to investors, but also proposed countermeasures on the government todevelop the stock market.