Habit Formation, Equity Premium and the Evidence of Chinese Market

This paper expands CCAPM by introducing habit Formation. It is introduced in utility function, and combines with real consumption to produce surplus consumption ratio. Surplus consumption ratio is used to describe economic boom or depression. Simulated data is also offered in the process when we look surplus consumption ratio as state variable, and then simulated data is produced. The result proves that the model can describe historic trend of financial data. It is necessary to support Chinese finical development that all Chinese's habit formation has steadily improved.