Behavioural heterogeneity and equity premium volatility in China

Zhong-Qiang Zhou, Ping Huang, Desheng Fu and Wei Zhang

Applied Economics Letters, 2022, vol. 29, issue 15, 1399-1404

Abstract: This paper develops a simple heterogeneous agents model with fundamentalists and chartists. It examines whether investors’ behavioural heterogeneity is related to excess volatility of equity premium in the Chinese stock market. To calculate deviations between the realized and expected values of the equity premium, we use consumption growth model and dividend growth model to estimate the expected equity premiums of CSI 300 from January 2005 to December 2019. After estimating the heterogeneous agents model using the CSI 300 monthly data, we find that investors’ heterogeneity in price trends and trading strategies can significantly explain excess volatility of equity premium. Our analysis of two significant fluctuations, specifically the booms and busts of 2007–2008 and 2014–2015, further corroborates our key finding that investors’ behavioural heterogeneity plays an important role in explaining excess volatility of equity premium.

Date: 2022
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DOI: 10.1080/13504851.2021.1937033

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