WOULD THERE EVER BE CONSENSUS VALUE AND SOURCE OF THE EQUITY RISK PREMIUM? A REVIEW OF THE EXTANT LITERATURE

2006 ◽  
Vol 09 (02) ◽  
pp. 199-215
Author(s):  
OLUWATOBI OYEFESO
Keyword(s):  
Risk Premium ◽  
Equity Premium ◽  
Unresolved Issue ◽  
Equity Risk Premium ◽  
Equity Premium Puzzle ◽  
Market Risk Premium ◽  
Consensus Value ◽  
Equity Risk ◽  
Premium Puzzle ◽  
The Relationship

This paper reviews the extant studies on the equity premium. While paper attempts to make the review comprehensive, describing all of the work in this area is difficult considering the numerous researches that have been done in this area. Essentially, the paper assesses the relationship between the excess return and the equity risk premium and draws attention to their interchangeable use in the finance literature. Existing literature is reviewed around possible theories explaining the equity premium puzzle and followed by the empirical evidence on the theories. Finally, this paper focuses on the problems of attaining consensus value and source of the market risk premium, which makes equity premium puzzle an unresolved issue among the academics and finance practitioners.

Another Look at the Equity Risk Premium Puzzle

2015 ◽  
Vol 16 (4) ◽  
pp. 490-501 ◽  
Author(s):  
Günter Bamberg ◽  
Sebastian Heiden
Keyword(s):  
Risk Aversion ◽  
Financial Markets ◽  
Risk Premium ◽  
Equity Premium ◽  
Equity Risk Premium ◽  
Economic Agents ◽  
Equity Risk ◽  
Pareto Tails ◽  
Return Distributions ◽  
Premium Puzzle

AbstractThe model of Mehra and Prescott (1985, J. Econometrics, 22, 145-161) implies that reasonable coefficients of risk-aversion of economic agents cannot explain the equity risk premium generated by financial markets. This discrepancy is hitherto regarded as a major financial puzzle. We propose an alternative model to explain the equity premium. For normally distributed returns and for returns far away from normality (but still light tailed), realistic equity risk premia do not imply puzzlingly high risk aversions. Following our approach, the ‘equity premium puzzle’ does not exist. We also consider fat-tailed return distributions and show that Pareto tails are incompatible with constant relative risk aversion.

scholarly journals Equity Risk Premium Puzzle: Evidence from Indonesia and Sri Lanka

2019 ◽  
Vol 55 (2) ◽  
pp. 239-248
Author(s):  
Prabath S. Morawakage ◽  
Pulukkuttige D. Nimal ◽  
Duminda Kuruppuarachchi
Keyword(s):  
Sri Lanka ◽  
Risk Premium ◽  
Equity Risk Premium ◽  
Equity Risk ◽  
Premium Puzzle

The expected return on United Kingdom equities and an implication for pension fund valuations

1993 ◽  
Vol 120 (2) ◽  
pp. 253-309
Author(s):  
P. D. Jones
Keyword(s):  
United Kingdom ◽  
Risk Premium ◽  
Pension Fund ◽  
Economic Recession ◽  
Excess Return ◽  
Yield Ratio ◽  
Equity Risk Premium ◽  
Expected Return ◽  
Equity Risk ◽  
The Relationship

AbstractThe paper analyses the relationship between equities and gilt-edged. It shows that the yield ratio (the yield on gilts divided by that on equities) should no longer hold its almost mystical significance of the last decade, being but one component of the expected return on equities, in which the most significant element is the rate of dividend growth relative to the yield on gilt-edged. How equities perform in economic recession is highlighted. The paper reviews the performance of equities over the last 70 years in both nominal and real terms and analyses the historic sources of the equity risk premium, i.e. the excess return of equities over gilt-edged. If the equity risk premium remains at below-average levels in the 1990s, as is possible, constraints may be placed on actuaries' choice of pension fund valuation bases.

The Uncertainty Premium in an Ambiguous Economy

2011 ◽  
Vol 01 (02) ◽  
pp. 323-354 ◽  
Author(s):  
Yehuda Izhakian ◽  
Simon Benninga
Keyword(s):  
Risk Aversion ◽  
Risk Premium ◽  
Equity Premium ◽  
Equity Premium Puzzle ◽  
Smooth Model ◽  
Increasing Risk ◽  
Premium Puzzle ◽  
Additional Explanation

The uncertainty premium is the premium that is derived from not knowing the sure outcome (risk premium) and from not knowing the precise odds of outcomes (ambiguity premium). We generalize Pratt's risk premium to uncertainty premium based on Klibanoff et al.'s (2005) smooth model of ambiguity. We show that the uncertainty premium can decrease with an increase in decision maker's risk aversion. This happens because increasing risk aversion always results in a lower ambiguity premium. The positive ambiguity premium may provide an additional explanation to the equity premium puzzle.

scholarly journals Equity Premium with Habits, Wealth Inequality and Background Risk

2021 ◽  
Vol 14 (7) ◽  
pp. 321
Author(s):  
Christos I. Giannikos ◽  
Georgios Koimisis
Keyword(s):  
Asset Pricing ◽  
Risk Premium ◽  
Equity Premium ◽  
Wealth Inequality ◽  
Exchange Economy ◽  
Background Risk ◽  
Equity Risk Premium ◽  
Income Uncertainty ◽  
Equity Risk ◽  
Asset Pricing Puzzles

In an exchange economy with endowment inequality, we investigate how preferences with external habits affect the equity risk premium. We show that the dynamics of external additive habits with wealth inequality are complex when a background risk is present. It is ambiguous whether wealth inequality will increase or decrease the equity premium even when the income uncertainty is low. This result extends literature by suggesting that wealth inequality has a small role in explaining asset pricing puzzles.

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