| Equity Risk Premium (ERP) is the difference between the expected return of stocks and risk-free rate. It is a key measure of the degree of risk aversion and an important determinant of the cost of capital for corporations, savings decisions of individuals and budgeting plans for government. The importance of the ERP is self-evident. However, whether in the theoretical research or in practical application, there are differences between the estimations of ERP. In foreign country, there are dozens of models that used by practitioners and featured in the academic literature, using more than 100 economic variables to estimate the ERP. Scope of the valuation data used by domestic academic circles in 4%～30%, very scattered. Estimation methods of the ERP are varied, and using different methods will produce different results. In order to get reliable estimations, the choice of methods is particularly important. Affected by the degree of development of capital market and its characteristics, different countries have their own ERP. In order to arrive at a correct estimation of the risk premium equity, it is important to choose the useful methods. Chinese scholars use the existing methods directly, seldom discusses the applicability of the methods, so it is necessary to do some researches on it.The ideas of this paper are mainly as follows:supplements for deficiencies in domestic researches on equity risk premium. On the one hand, it classifies the estimation methods at home and abroad, analyses and compares the advantages and disadvantages of methods which used more often to estimate the ERP, expands the domestic method system of the estimations; On the other hand, from the perspective of the empirical analysis, it chooses the typical models of different methods, combines with specific data to estimate the ERP, then uses the empirical results to show the applicability of the methods in our country and finds out the most suitable methods.The innovations of this paper are mainly as follows:first, this paper classifies the methods which are used to estimate the ERP, then, on the basis of classification and summary, it compares and analyzes all the methods. Second, the paper not only compares the methods, it also uses the basic models of each method and the data of the stock market of our country to estimate the ERP. Third, compared with the domestic literatures, this paper obtains the estimations of the ERP of different methods, then tests the reliability of the estimations, judges the validity of the result, and then verdicts the applicability of the methods.The paper is divided into seven parts. The first part is the introduction. In the introduction, the backgrounds of the research were analyzed, the contents and the research methods were described, the theoretical and practical meanings of the research were analyzed, and it finally describes the innovations and deficiencies of the research. The second part is the literature review. In this part, the paper first describes the connotation of the equity risk premium and the principle formula of estimations of the ERP. Then this paper illustrates the achievements which have been made in the field of the researches of the equity risk premium. The third part is the comparative study of estimation methods of the ERP. In this part, the paper elaborates the principles of the three categories methods; from the point of view of the principle characteristics of various methods, they have their respective advantages and disadvantages. The fourth part is the estimations of the ERP of our country using the ex-post estimation methods. In this part, the paper designs the steps of three kinds of methods, combines with the specific data and then estimates the value of ERP. The fifth part of the paper is the estimations of the ERP of our country using the ex-ante estimation methods. The logical thinking of the part is similar to the fourth part. The sixth part is the analysis of the applicability of the estimation methods. This part mainly summarizes and tests the estimation results of each method. The last part is conclusion. This section explains the conclusions in this paper.The conclusions are mainly reflected in the following aspects:first, the results of the estimation method of surveys are subjective, they can only be used as a reference, cannot be directly used for the theoretical estimations of the ERP. Second, ex-post estimation methods use historical data to estimate the ERP, the results are restricted by the length and quantity of the historical data. The stock market of our country has a short history, for the historical mean of realized returns, the cross-section regressions and the time-series regressions, the effects of this restriction is greater. Combining analyses and tests of the empirical results, the models of ex-post estimation methods used in this paper to estimate the ERP do not have reliability. Therefore, according to our country stock market’s current development situation, the estimation effect of ex-post estimation methods may not be ideal, but this does not mean that such methods are completely undesirable. Perhaps with gradually development of the stock market of our country, there will be more historical data, more improved calculation models to apply to estimate the ERP reliably. Third, ex-ante estimation methods overcome the problem of lacking historical data in the application of ex-post estimation methods, they use forecast future cash flows to estimate the ERP. However, due to the imperfect dividend policy of listed companies in our country and unstable dividend payments, based on the data of analysts’forecast, it is not ideal to use the classical dividend discount models to estimate the ERP. The statistical model forecast estimation methods get the forecast future cash flows from the regressions, the quality of the forecasts is better than analysts’ forecasts, so they can draw relatively reliable results. Therefore, compared with ex-post estimation methods, ex-ante estimation methods which require higher quality of future data are more suitable for use in the estimation of the ERP of our country. And in the ex-ante estimation methods, because the statistical models have higher accuracies for the forecast of the future cash flow, it becomes the most effective method to estimate the ERP. Fourth, through the whole analysis of this paper, it finally comes to the conclusion that, in all methods, according to the results of the models used in this paper, the best method to estimate the ERP of our country is the statistical model forecast estimation methods. But with the continuous development of the stock market and gradually development and perfection of all kinds of methods, the applicability of the other methods may enhance, and it needs to wait for follow-up researches to analyze and verify. |
