Explaining the equity premium in Hong Kong with C-CAPM: The use of emigration growth as an instrument |
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| Authors: | Henry Tam Liona Lai |
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| Institution: | 1. Interdisciplinary Conservation Science Research Group, Centre for Urban Research, School of Global, Urban and Social Studies, RMIT University, Melbourne, VIC 3000, Australia;2. Institute for Applied Ecology, Institute for Governance and Policy Analysis, University of Canberra, Bruce, ACT 2601, Australia;1. Lee Kuan Yew School of Public Policy, National University of Singapore, 469C Bukit Timah Road, Singapore 259772, Singapore;2. Crawford School of Economics and Government, The Australian National University, Australia;3. Centre of Excellence for Biosecurity Risk Analysis, University of Melbourne, Australia;4. Department of Economics and Institute of Environmental Sustainability, Monash University, Melbourne, Australia;1. New Mexico Institute of Mining & Technology, Department of Management, 801 Leroy Place, Socorro, NM 87801, USA;2. Tokyo Institute of Technology, Department of Value and Decision Science, Graduate School of Decision Science and Technology, W9-41, 2-12-1, Ookayama, Meguro-ku, Tokyo 152-8552, Japan |
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| Abstract: | We test the C-CAPM with CRRA utility using Hong Kong data. In 2SLS regressions, we obtain rather high estimates of the coefficient of relative risk aversion, which could explain the high equity premium in Hong Kong. Because we use lagged emigration growth as an instrument in the first-stage regression, which has significant negative impact on future stock market return in Hong Kong, the first-stage R2 and F-statistics are rather high and the weak instrument critique of the validity of 2SLS regressions is potentially resolved. Weak-instrument-robust tests also confirm that the degree of risk aversion is indeed high for Hong Kong. |
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