Abstract Campbell and Cochrane(1999) power utility model with habit formation, limited in Hansen-Jagannathan volatility bound test the equity premium puzzle. In this paper , we modify the Campbell and Cochrane model, investigate the equity premium puzzle in China with the Hansen-Jagannathan volatility bound, also compare the pricing ability of different model such as CRRA. Our main findings are: (1) There is neither equity premium puzzle, nor risk-free rate puzzle in China; (2) Incorporate the habit formation will increase the pricing ability of our model.
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Received: 10 March 2010
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