Abstract
This paper proposes a neglected factor determining the stock returns from the perspective of firmbehavior, i.e. the volatility of the asset of corresponding firms and thus contributes to the factor model.To this end, we model the wealth accumulation path of the firms and derive the relationship between risk premium and asset volatility. We document robust evidence that one standard deviation rise in volatility requires an increase of risk premium by 21.1%. Besides, we find that listed firms in China are more risk averse and required a higher return by investors than those in United States, and phenomena are more pronounced in non-state-owned enterprises and firms in competitive industries. These findings suggest that capital market in China is immature and too speculative, corresponding policy implications are thus derived.
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