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.

Revisiting Equity Premium Puzzles in a Data-Rich Environment

2019 ◽  
Vol 65 (4) ◽  
pp. 257-275
Author(s):  
Mohamed Douch ◽  
Mohammed Bouaddi
Keyword(s):  
Relative Risk ◽  
Risk Aversion ◽  
Equity Premium ◽  
Time Varying ◽  
Relative Risk Aversion ◽  
Marginal Rate ◽  
Marginal Rate Of Substitution ◽  
Premium Puzzle ◽  
The Interest Rate ◽  
Risk Free Rate

Abstract This paper modifies the conventional representative-agent consumption-based equilibrium models by making the habit-formation part depend on additional factors related to economic conditions. This paper assumes that innovations in the consumption surplus ratio are determined not only by consumption growth but also by other macroeconomic and financial factors. The resulting model allowed for a separation between the intertemporal elasticity of substitution and risk aversion. The model also generates highly volatile Intertemporal marginal rate of substitution which translates into fluctuating volatility capturing time varying economic uncertainty. The long-standing equity premium puzzle seems to have been resolved. The resulting pricing model accounts for a number of interesting properties, such as time-varying risk aversion, small relative risk aversion and an equity premium that is compatible with the observed equity premium. These results are obtained with admissible range of local relative risk aversion. In addition, the model generated small risk-free rate resolving the interest rate 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.

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

ON THE SHAPE OF RISK AVERSION AND ASSET ALLOCATION

2014 ◽  
Vol 17 (08) ◽  
pp. 1450054
Author(s):  
PIERRE SIX
Keyword(s):  
Relative Risk ◽  
Numerical Analysis ◽  
Risk Aversion ◽  
Asset Allocation ◽  
Empirical Studies ◽  
Relevant Literature ◽  
Relative Risk Aversion ◽  
Measures Of Risk ◽  
Constant Relative Risk Aversion

This paper demonstrates the simple incorporation of any shape of risk aversion into an asset allocation framework. Indeed, the relevant literature about risk aversion shows mixed evidence regarding the shape of this important but subjective variable. Our setting builds on, and can be compared with, the well-known constant relative risk aversion (CRRA) framework and mostly preserves the tractability of the affine-CRRA framework. Our numerical analysis exhibits some link between measures of risk aversions and empirical studies of asset allocation.

scholarly journals The Equity Premium Puzzle in Nepal

2013 ◽  
Vol 3 (1) ◽  
pp. 28-42
Author(s):  
Biwesh Neupane
Keyword(s):  
Risk Aversion ◽  
Risk Premium ◽  
Equity Premium ◽  
Developed Countries ◽  
Surprising Result ◽  
Equity Premium Puzzle ◽  
Time Period ◽  
Real Risk ◽  
Common Stocks ◽  
Premium Puzzle

The study concentrates on one of the most famous puzzles in asset pricing, the equity premium puzzle, which was first identified by Mehra and Prescott (1985). The paper examines the existence and extent of the equity premium puzzle in Nepalese market. The equity premium puzzle refers to the fact that common stocks have offered a very high real risk premium over that of risk-free bills, which leads to unexplainable high risk-aversion of the investors. The study considers the time period of 1995/96 to 2007/08. The result shows that the equity premium exists in Nepal even though the advent of the premium is low compared to other developed countries. This could be a surprising result given the Nepalese context. It was found that the risk aversion of Nepalese investors is greater than 10 (the upeer boundary set by Mehra and Prescott, 1985) which do not fit the conventional financial theories resulting in unexplainable equity premium puzzle. DOI: http://dx.doi.org/10.3126/bj.v3i1.7509 Banking Journal Vol.3(2) 2013 pp.28-42

Sign in / Sign up

Export Citation Format

Share Document