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Stock Price Dynamics of China: What Do the Asset Markets Tell Us About the Chinese Utility Function?

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  • Yum K. Kwan
  • Jinyue Dong

Abstract

We develop and estimate several variants of consumption-based capital asset pricing models (CCAPMs) and compare their capacity in explaining the stock price dynamics of China. We conclude that adding housing to CCAPM and habit formation models yields no significant benefit in predicting stock returns, but adding housing to recursive utility models does improve predictions. Furthermore, the labor income model cannot help reduce pricing errors, but the collateral constraint model outperforms almost all other models. Some models cannot even defeat the simple autoregressive model in stock return prediction. Overall, the H-recursive utility model has the best prediction performance. Directions for future research are discussed.

Suggested Citation

  • Yum K. Kwan & Jinyue Dong, 2014. "Stock Price Dynamics of China: What Do the Asset Markets Tell Us About the Chinese Utility Function?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(03), pages 77-108, May.
    • Handle: RePEc:mes:emfitr:v:50:y:2014:i:03:p:77-108
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    Cited by:

    1. Yongheng Deng & Eric Girardin & Roselyne Joyeux & Shuping Shi, 2017. "Did bubbles migrate from the stock to the housing market in China between 2005 and 2010?," Pacific Economic Review, Wiley Blackwell, vol. 22(3), pages 276-292, August.
    2. Chen, Qi-An & Li, Huashi & Lin, Jianyi & Yan, Youliang, 2023. "Asset pricing with two types of heterogeneous consumption volatilities in mind: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).

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