Stock price dynamics of China : What do the asset markets tell us about the Chinese utility function?

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)77-108
Journal / PublicationEmerging Markets Finance and Trade
Issue numberSupplement 3
Publication statusPublished - May 2014


We develop and estimate several variants of consumption-based capital asset pricing models (CCAPMs) and compare their capacity in explaining the stock price dynamics of China. We conclude that adding housing to CCAPM and habit formation models yields no significant benefit in predicting stock returns, but adding housing to recursive utility models does improve predictions. Furthermore, the labor income model cannot help reduce pricing errors, but the collateral constraint model outperforms almost all other models. Some models cannot even defeat the simple autoregressive model in stock return prediction. Overall, the H-recursive utility model has the best prediction performance. Directions for future research are discussed.

Research Area(s)

  • Collateral constraint, Habit formation, Housing-augmented consumption-based asset pricing, Labor income and home production, Recursive utility, Stock returns.