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Risks 2018, 6(4), 128; https://doi.org/10.3390/risks6040128

The Fundamental Equity Premium and Ambiguity Aversion in an International Context

1
Department of Financial Market, School of Banking, University of Economics, Ho Chi Minh City 800010, Vietnam
2
Department of Banking and Finance, Faculty of Business Administration, University of Trier, Trier 54296, Germany
3
Department of Finance and Economics, School of Management, Xi’an Polytechnic University, Xi’an 710048, China
*
Author to whom correspondence should be addressed.
Received: 2 August 2018 / Revised: 3 October 2018 / Accepted: 17 October 2018 / Published: 6 November 2018
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Abstract

Stocks are riskier than bonds. This causes a risk premium for stocks. That the size of this premium, however, seems to be larger than risk aversion alone can explain the so-called “equity premium puzzle”. One possible explanation is the inclusion of a degree of ambiguity in stock returns to account for an additional ambiguity premium, whose size depends on the degree of ambiguity aversion among investors. It is, however, difficult to test this empirically. In this paper, we compute the first firm-level estimation of equity premium based on the internal rate of return (IRR) approach for a total of N = 28,256 companies in 54 countries worldwide. Using a survey of international data on ambiguity aversion, we find a strong and robust relation between equity premia and ambiguity aversion. View Full-Text
Keywords: equity premium puzzle; ambiguity aversion; uncertainty aversion equity premium puzzle; ambiguity aversion; uncertainty aversion
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).
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Ngo, M.H.; Rieger, M.O.; Yuan, S. The Fundamental Equity Premium and Ambiguity Aversion in an International Context. Risks 2018, 6, 128.

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