Chinese Consumption Shocks and U.S. equity returns

41 Pages Posted: 29 Nov 2023

See all articles by Kiryoung Lee

Kiryoung Lee

Hankuk University of Foreign Studies

Minki Kim

Korea Capital Market Institute (KCMI)

Sing-Sen Lam

Sun Yat-sen University (SYSU) - Lingnan (University) College

Date Written: November 10, 2023

Abstract

Motivated by the growing importance of the Chinese domestic economy for the global economic condition, we test whether the consumption risk of China matters for the cross-section of U.S. equity returns. We find that the two-factor international asset-pricing model with both U.S. and Chinese consumption risk explains 40\% of the cross-sectional variation in U.S. equity returns. We also find a sizable risk premium of 7.08\% per annum. This finding is robust to different estimation approaches, portfolio groups, controlling for other equity factors, and using individual equities. For economic mechanism, we find that it is the discount rate channel that is related to investors' risk aversion, sentiment, and economic uncertainty through which Chinese consumption matters for the U.S. equity returns. Also, the result is not entirely driven by Chinese investors participating in the U.S. Overall, we present equity market-based novel evidence of the importance of Chinese macro fundamentals for the U.S.

Keywords: International asset-pricing model, Cross-section of equity returns, Chinese consumption

JEL Classification: G12, G13, G15

Suggested Citation

Lee, Kiryoung and Kim, Minki and Lam, Sing-Sen, Chinese Consumption Shocks and U.S. equity returns (November 10, 2023). Available at SSRN: https://ssrn.com/abstract=4629366 or http://dx.doi.org/10.2139/ssrn.4629366

Kiryoung Lee (Contact Author)

Hankuk University of Foreign Studies ( email )

Division of Chinese Foreign Affairs and Commerce
107, Imun-ro, Dongdaemun-gu
Seoul, Seoul
Korea, Republic of (South Korea)

Minki Kim

Korea Capital Market Institute (KCMI) ( email )

Korea, Republic of (South Korea)

Sing-Sen Lam

Sun Yat-sen University (SYSU) - Lingnan (University) College

135 Xingang Xi Road
Haizhu District
Guangzhou, Guangdong 510275
China

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