Investment under event risk in china stock market: A theoretical analysis

Accepted 25 January 2007

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Shanghai Jiao Tong University,Mingchao Cai

Renmin University of China,Yongxiang Wang

University of International Business and Economics,Weixing Wu

We model investors' optimal portfolio policy in the case of potential event risk (circulation of State-owned
Equities) in China stock market, and derive a Liquidity-based Asset Pricing Model.We show that the potential
event risk deters some investors from entering the market, leading to a thin stock market. Some implications
of the model are derived.