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Estimating Equity Risk Premium: The Case of Great China

Jie Zhu

University of Aarhus - School of Economics and Management; University of Aarhus - CREATES

December 10, 2008

The expected equity risk premium is a key input of many asset prcing models in finance. There exist a number of methods to estimate the risk premium. It is also well documented that the risk premium is time-varying. This paper briefly reviews two different approaches. More specifically, the historical average and relative estimation are taken into closer examination. The first approach is applied to estimate equity risk premium for stock markets in Great China when the stock markets were recovering from the bottom. Then the relative estimation approach is also adopted to empirical data to justify the findings in the first one, which takes into consideration the lower required rate of return for Chinese investors due to lack of investment opportunities. After making these adjustments, we find that risk premium in mainland China is close to risk premium for Hong Kong and Taiwan markets. All of those markets have higher risk premium compared to US market. The risk premium for Shanghai and Shenzhen market are about 8% and 10% respectively. For Hong Kong and Taiwan these numbers become 8% and 9%, where the long-term forward-looking risk premium for US market is about 4%.

Number of Pages in PDF File: 25

Keywords: Equity risk premium, Relative estimation, Required rate of return

JEL Classification: G12, G15

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Date posted: April 27, 2009 ; Last revised: June 3, 2009

Suggested Citation

Zhu, Jie, Estimating Equity Risk Premium: The Case of Great China (December 10, 2008). Available at SSRN: https://ssrn.com/abstract=1314290 or http://dx.doi.org/10.2139/ssrn.1314290

Contact Information

Jie Zhu (Contact Author)
University of Aarhus - School of Economics and Management ( email )
Building 1323, Room 226
Aarhus, 8000
+45-89422138 (Phone)
University of Aarhus - CREATES ( email )
School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
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