Do The Retest Based On The"Equity Premium Puzzle"in China And Utilize Long Run Risk Model To Do The Interpretation

The paper displays a retest of "Equity Premium Puzzle" phenomenon in China. The economic meaning of "Equity Premium Puzzle" is that the yield rate of equity is much higher than the risk-free rate and only by setting a high relative risk aversion coefficient could give an interpretation of such high equity premium. However, domestic relative research could not provide a coincident conclusion on whether "Equity Premium Puzzle" exists in China or not. The paper describes two different methods to do the empirical test. One is based on the estimated expression of the relative risk aversion coefficient derived from the traditional C-CAPM and the other is based on the Hansen-Jagannathan minimum variance test. According to the first method, the relative risk aversion coefficient estimated is far beyond the reasonable interval [0,10] and the test result of the second method reveals that the critical relative risk aversion coefficient based on any time discount factor is also beyond the reasonable interval. The two results both illustrate that "Equity Premium Puzzle" really exists in China and the two methods have the consistence on intrinsic economic meaning, which makes the result more persuasive. Based on the test result I also try to utilize the foreign popular Long Run Risk Model to do the interpretation on the "Equity Premium Puzzle" phenomenon in China and by the calibration and simulation of the consume parameter, the dividend parameter and preference parameter I found the relative risk aversion coefficient derived from the calibration is in an acceptable interval. Thus the Long Run Risk model also provides a satisfying result for the interpretation of "Equity Premium Puzzle" in China.