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.