scholarly journals Anomalies: The Equity Premium Puzzle

1997 ◽  
Vol 11 (1) ◽  
pp. 191-200 ◽  
Author(s):  
Jeremy J Siegel ◽  
Richard H Thaler
Keyword(s):  
Risk Aversion ◽  
Equity Premium ◽  
Fixed Income ◽  
Fixed Income Securities ◽  
Treasury Bills ◽  
Long Time ◽  
Survivorship Bias ◽  
Time Periods ◽  
The Difference ◽  
Premium Puzzle

The equity premium is the difference in returns between equities and fixed income securities, such as Treasury bills. The puzzle refers to the fact that the premium has historically been very large--about 6 percent per year--too large to be easily explained by risk aversion. The authors document the evidence for the puzzle and find that is exists in many countries, over long time periods, and does not seem to be explained by survivorship bias. They also summarize several theoretical explanations. The authors conclude that it is difficult to explain the equity premium without incorporating some kind of irrationality.

scholarly journals Solution to the Equity Premium Puzzle

2021 ◽  
Author(s):  
Atilla Aras
Keyword(s):  
Relative Risk ◽  
Risk Aversion ◽  
Risk Behavior ◽  
Empirical Studies ◽  
Equity Premium ◽  
Subjective Time ◽  
Relative Risk Aversion ◽  
Equity Premium Puzzle ◽  
Time Discount ◽  
Premium Puzzle

This study provides a solution of the equity premium puzzle. Questioning the validity of the Arrow-Pratt measure of relative risk aversion for detecting the risk behavior of investors, a new tool in the form of the sufficiency factor of the model was developed to analyze the risk behavior of investors. The calculations of this newly tested model show that the value of the coefficient of relative risk aversion is 1.033526 by assuming the value of the subjective time discount factor as 0.99. Since these values are compatible with the existing empirical studies, they confirm the validity of the newly derived model that provides a solution to the equity premium puzzle.

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 Private Equity Premium Puzzle Revisited

2014 ◽  
Vol 104 (10) ◽  
pp. 3297-3334 ◽  
Author(s):  
Katya Kartashova
Keyword(s):  
Private Equity ◽  
Equity Premium ◽  
The United States ◽  
Equity Returns ◽  
Equity Premium Puzzle ◽  
Public And Private ◽  
Private And Public ◽  
The Difference ◽  
Premium Puzzle ◽  
Public Equity

This paper revisits the results of Moskowitz and Vissing-Jørgensen (2002) on returns to entrepreneurial investments in the United States. Following the authors' methodology and new data from the Survey of Consumer Finances, I find that the “private equity premium puzzle” does not survive the period of high public equity returns in the 1990s. The difference between private and public equity returns is positive and large period-by-period between 1999 and 2007. Whereas in the 2008–2010 period, overlapping with the Great Recession, public and private equities performances are substantially closer. I validate these results in the aggregate data going back to the 1960s. (JEL G11, G12, L26)

United States Treasury Securities

2019 ◽  
pp. 121-138
Author(s):  
Alan N. Rechtschaffen
Keyword(s):  
Interest Rates ◽  
Federal Government ◽  
Yield Curve ◽  
Fixed Income ◽  
Fixed Income Securities ◽  
United States Treasury ◽  
Treasury Bills ◽  
Treasury Securities ◽  
Treasury Department ◽  
The U.S

This chapter begins with a discussion of the purpose and goals of treasury securities. Treasury securities are a type of debt instrument providing limited credit risk. U.S. Treasury bills, notes, and bonds are issued by the Treasury Department and represent direct obligations of the U.S. government. Treasury securities are used to meet the needs of investors who wish to “loan” money to the federal government and in return receive a fixed or floating interest rate. The Treasury yield curve is a benchmark for fixed income securities across the spectrum of debt securities. The remainder of the chapter covers types of treasury securities, pricing, bond auctions and their effect on price, interest rates, and STRIPS (separate trading of registered interest and principal securities).

Age‐Dependent Increasing Risk Aversion and the Equity Premium Puzzle

2019 ◽  
Vol 54 (2) ◽  
pp. 377-412 ◽  
Author(s):  
Amadeu DaSilva ◽  
Mira Farka ◽  
Christos Giannikos
Keyword(s):  
Risk Aversion ◽  
Equity Premium ◽  
Equity Premium Puzzle ◽  
Age Dependent ◽  
Increasing Risk ◽  
Premium Puzzle

scholarly journals Ambiguity Aversion and the Variance Premium

2019 ◽  
Vol 09 (02) ◽  
pp. 1950003 ◽  
Author(s):  
Jianjun Miao ◽  
Bin Wei ◽  
Hao Zhou
Keyword(s):  
Risk Aversion ◽  
Ambiguity Aversion ◽  
Equity Premium ◽  
Return Variance ◽  
Quantitative Performance ◽  
The Mean ◽  
The Difference ◽  
Risk Free Rate ◽  
Mean Variance ◽  
Free Rate

This paper offers an ambiguity-based interpretation of the variance premium — the difference between risk-neutral and objective expectations of market return variance — as a compounding effect of both belief distortion and variance differential regarding the uncertain economic regimes. Our calibrated model can match the variance premium, the equity premium, and the risk-free rate in the data. We find that about 97% of the mean–variance premium can be attributed to ambiguity aversion. A three-way separation among ambiguity aversion, risk aversion, and intertemporal substitution, permitted by the smooth ambiguity preferences, plays a key role in our model’s quantitative performance.

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.

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