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Myopic loss aversion, disappointment aversion, and the equity premium puzzle

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  • Fielding, David
  • Stracca, Livio

Abstract

This paper takes a close look at the 'behavioural finance' explanations of the equity premium puzzle, namely myopic loss aversion (Benartzi and Thaler, 1995) and disappointment aversion (Ang, Bekaert and Liu, 2000). The paper proposes a simple specification of loss and disappointment aversion and brings these theories to the data. The main conclusion of the paper is that a highly short-sighted investment horizon is required for the historical equity premium to be explained by loss aversion, while reasonable values for disappointment aversion are found also for long investment horizons. So, stocks may lose only in the short term, but may disappoint also in the long term. JEL Classification: G11, G12

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 64 (2007)
Issue (Month): 2 (October)
Pages: 250-268

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Handle: RePEc:eee:jeborg:v:64:y:2007:i:2:p:250-268

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  1. Rabin, Matthew, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Department of Economics, Working Paper Series qt731230f8, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  19. Nicholas Barberis & Ming Huang, 2001. "Mental Accounting, Loss Aversion, and Individual Stock Returns," NBER Working Papers 8190, National Bureau of Economic Research, Inc.
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Cited by:
  1. Ricardo M. Sousa, 2007. "Wealth Shocks and Risk Aversion," NIPE Working Papers 28/2007, NIPE - Universidade do Minho.
  2. Mark Salmon & Soosung Hwang & Gordon Gemmill, 2005. "Performance Measurement with Loss Aversion," Working Papers wp05-08, Warwick Business School, Finance Group.
  3. Pavlo Blavatskyy & Ganna Pogrebna, 2010. "Reevaluating evidence on myopic loss aversion: aggregate patterns versus individual choices," Theory and Decision, Springer, vol. 68(1), pages 159-171, February.
  4. Ascari, Guido & Rankin, Neil, 2004. "Perpetual youth and endogenous labour supply: a problem and a possible solution," Working Paper Series 0346, European Central Bank.
  5. Olsen, Robert A., 2008. "Trust as risk and the foundation of investment value," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(6), pages 2189-2200, December.
  6. Kim, Sei-Wan & Krausz, Joshua & Nam, Kiseok, 2013. "Revisiting asset pricing under habit formation in an overlapping-generations economy," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 132-138.

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