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The equity premium in China

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  • Ping Huang
  • Zhong-Qiang Zhou
  • Wei Zhang

Abstract

The equity premium is a key indicator in capital investment decisions. However, few studies estimate the equity premium for the Chinese stock market. To shed more light on the subject, we use dividend and consumption growth models to estimate the expected equity premium in China from 2005 to 2017. Our evidence shows that the geometric mean of the expected yearly equity premium from the consumption growth model, 9.69 percent, is similar to that of the realized yearly equity premium from stock returns, 8.11 percent. The corresponding values are 0.74–0.68 percent for monthly data, and 2.49–2.28 percent for quarterly data. In contrast, the estimate of the expected equity premium from the dividend growth model is far higher than the realized equity premium. However, both the dividend and consumption growth models fail to explain the high fluctuations of the realized equity premium.

Suggested Citation

  • Ping Huang & Zhong-Qiang Zhou & Wei Zhang, 2020. "The equity premium in China," Applied Economics Letters, Taylor & Francis Journals, vol. 27(13), pages 1112-1118, June.
    • Handle: RePEc:taf:apeclt:v:27:y:2020:i:13:p:1112-1118
    DOI: 10.1080/13504851.2019.1673295
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