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Keywords = equity premium puzzle

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15 pages, 2295 KB  
Article
Equity Premium with Habits, Wealth Inequality and Background Risk
by Christos I. Giannikos and Georgios Koimisis
J. Risk Financial Manag. 2021, 14(7), 321; https://doi.org/10.3390/jrfm14070321 - 12 Jul 2021
Viewed by 2498
Abstract
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 [...] Read more.
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. Full article
(This article belongs to the Special Issue Asset Allocation)
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51 pages, 751 KB  
Review
Review on Efficiency and Anomalies in Stock Markets
by Kai-Yin Woo, Chulin Mai, Michael McAleer and Wing-Keung Wong
Economies 2020, 8(1), 20; https://doi.org/10.3390/economies8010020 - 12 Mar 2020
Cited by 56 | Viewed by 58835
Abstract
The efficient-market hypothesis (EMH) is one of the most important economic and financial hypotheses that have been tested over the past century. Due to many abnormal phenomena and conflicting evidence, otherwise known as anomalies against EMH, some academics have questioned whether EMH is [...] Read more.
The efficient-market hypothesis (EMH) is one of the most important economic and financial hypotheses that have been tested over the past century. Due to many abnormal phenomena and conflicting evidence, otherwise known as anomalies against EMH, some academics have questioned whether EMH is valid, and pointed out that the financial literature has substantial evidence of anomalies, so that many theories have been developed to explain some anomalies. To address the issue, this paper reviews the theory and literature on market efficiency and market anomalies. We give a brief review on market efficiency and clearly define the concept of market efficiency and the EMH. We discuss some efforts that challenge the EMH. We review different market anomalies and different theories of Behavioral Finance that could be used to explain such market anomalies. This review is useful to academics for developing cutting-edge treatments of financial theory that EMH, anomalies, and Behavioral Finance underlie. The review is also beneficial to investors for making choices of investment products and strategies that suit their risk preferences and behavioral traits predicted from behavioral models. Finally, when EMH, anomalies and Behavioral Finance are used to explain the impacts of investor behavior on stock price movements, it is invaluable to policy makers, when reviewing their policies, to avoid excessive fluctuations in stock markets. Full article
(This article belongs to the Special Issue Efficiency and Anomalies in Stock Markets)
16 pages, 690 KB  
Article
Explanatory Power of Pre-Issue Financial Strength for Long-Term Market Performance: Evidence from Initial Equity Offerings on an Emerging Market
by Leszek Czapiewski and Joanna Lizińska
Int. J. Financial Stud. 2019, 7(1), 16; https://doi.org/10.3390/ijfs7010016 - 12 Mar 2019
Cited by 1 | Viewed by 4000
Abstract
This study tests possible sources of long-term risk-adjusted returns on initial public offerings (IPO) in Poland under the calendar-time portfolio (CTP) approach. The moment of going public still remains a puzzle in many areas. Poland’s status as an emerging market has been indisputable [...] Read more.
This study tests possible sources of long-term risk-adjusted returns on initial public offerings (IPO) in Poland under the calendar-time portfolio (CTP) approach. The moment of going public still remains a puzzle in many areas. Poland’s status as an emerging market has been indisputable for many years, though improvements in capital market infrastructure have led to its recent reclassification as a developed country. It is an important European equity market. Thus, research on IPO pricing explanation for Poland is important for both investors and academics. In this study, we estimate risk premiums and run regressions on four asset pricing models, including the latest innovation, which is the Fama-French 5-factor model. We also check the robustness. The research documents the existence of the long-run underperformance for Polish IPOs independently of the specification of the calendar-time portfolio approach as alphas range from −9.6% to −13.2% annually. We show that the underperformance is mainly driven by IPOs in a position of weak pre-issue financial health. More profitable IPOs experience less negative long-term returns and the underperformance is even absent in some specifications. Full article
(This article belongs to the Special Issue Financial Economics)
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24 pages, 447 KB  
Article
The Fundamental Equity Premium and Ambiguity Aversion in an International Context
by Minh Hai Ngo, Marc Oliver Rieger and Shuonan Yuan
Risks 2018, 6(4), 128; https://doi.org/10.3390/risks6040128 - 6 Nov 2018
Cited by 2 | Viewed by 6263
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 [...] Read more.
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. Full article
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