The implied growth rates and country risk premium: evidence from Chinese stock markets

Abstract

Realized stock market returns are volatile and poor reflections of economic growth and investor expectations in China. In this paper, we estimate simultaneously the implied long run growth rate and cost of equity capital for listed Chinese firms over the period 2004–2012. We find that the implied mean growth rate in earnings is around 10 % and the mean implied cost of capital is about 14.6 %. These suggest that the implied growth rates from companies’ fundamentals are in line with the economic growth and the implied cost of capital is consistent with investors’ expectations. Comparing with estimates for the US markets, we find that the mean country equity risk premium for this largest emerging market is about 6.5 %. Our study has important implications to the Chinese policy makers and international investors.