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Do Consumption Habit and Income Difference Eliminate the Risk Premium in Chinese Capital Market?
Author(s) -
Wang Yajie,
Geng Zhongyuan,
Yang Wuting
Publication year - 2019
Publication title -
the developing economies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.305
H-Index - 30
eISSN - 1746-1049
pISSN - 0012-1533
DOI - 10.1111/deve.12195
Subject(s) - consumption based capital asset pricing model , economics , capital asset pricing model , consumption (sociology) , risk premium , security market line , permanent income hypothesis , equity premium puzzle , habit , stock market , economic risk , econometrics , autonomous consumption , asset (computer security) , financial economics , monetary economics , finance , market liquidity , psychology , social science , debt , computer security , sociology , computer science , psychotherapist , paleontology , horse , biology
This paper explores the effects of Chinese urban residents' consumption habits with income differences on financial asset pricing over the period 1991–2016. With the use of generalized method of moments estimation, the results reveal that the specific values of habit‐formation parameter k eliminate the high‐risk premium puzzle in the standard consumption‐based Capital Asset Pricing Model to a certain extent based on the data of consumption of urban residents at different income levels, the rate of total stock market return, and the risk‐free asset return rate. Moreover, the empirical tests also uncover income differences that cannot explain the risk premium themselves but do reveal that people with different income levels have different attitudes toward risks.