Does equity premium puzzle exist in China: an analysis with the robust inference method

Abstract

ABSTRACT This study investigates the Chinese equity premium puzzle, a phenomenon that has been the subject of several inquiries in recent years. Central to the exploration is the potential unreliability of the relative risk aversion rate derived from the GMM approach, largely due to the quality of Chinese consumption data and the “limited T” problem. To ensure a robust examination, we adopted two robust inference methods.Our results consistently indicate that the estimated relative risk aversion is notably low, regardless of the variations in consumption measures used. This finding challenges the prevailing notion of the equity premium puzzle in the global context, suggesting its possible non-existence in China. Beyond providing a novel perspective on the Chinese equity premium puzzle, our study underscores the paramount importance of data integrity and the selection of appropriate methodologies in financial research.