The equity mispricing: Evidence from China's stock market

• The mispricing in China's equity market
• The margin trading and short sale activity in the emerging market
• The proxy of the equity risk premium in China based on a GARCH(1,1)-M model

This paper examines the equity mispricing in China's stock market. We measure China's equity mispricing based on the fundamental market-to-book value ratio. As we break down the equity bubble into two components—the earnings mispricing and the required-return mispricing—we find that the Chinese stock bubble is attributed to investors' required-return mispricing. This finding is consistent with the time-varying risk preference estimated by a GARCH-M model.