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Explaining the equity premium in Hong Kong with C-CAPM: The use of emigration growth as an instrument

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  • Tam, Henry
  • Lai, Liona
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    Abstract

    We test the C-CAPM with CRRA utility using Hong Kong data. In 2SLS regressions, we obtain rather high estimates of the coefficient of relative risk aversion, which could explain the high equity premium in Hong Kong. Because we use lagged emigration growth as an instrument in the first-stage regression, which has significant negative impact on future stock market return in Hong Kong, the first-stage R2 and F-statistics are rather high and the weak instrument critique of the validity of 2SLS regressions is potentially resolved. Weak-instrument-robust tests also confirm that the degree of risk aversion is indeed high for Hong Kong.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 19 (2009)
    Issue (Month): 3 (July)
    Pages: 520-533

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    Handle: RePEc:eee:intfin:v:19:y:2009:i:3:p:520-533

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    Web page: http://www.elsevier.com/locate/intfin

    Related research

    Keywords: Equity premium C-CAPM Instrumental variables Emigration Hong Kong;

    References

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