Abstract
We investigate the risk-return relation using data from China. Because it is segmented from the rest of the global financial market, China’s market allows us to shed new light on this important relation of which previous empirical evidence is inconclusive. Market variance and scaled market prices jointly forecast excess market returns. The relation with conditional equity premium is positive for market variance and negative for scaled market prices, although the two predictors correlate positively with each other. These findings are similar to those documented in the U.S. market; they suggest a multi-factor conditional equity premium model.
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