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The Fundamental Equity Premium and Ambiguity Aversion in an International Context

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  • Minh Hai Ngo

    (Department of Financial Market, School of Banking, University of Economics, Ho Chi Minh City 800010, Vietnam)

  • Marc Oliver Rieger

    (Department of Banking and Finance, Faculty of Business Administration, University of Trier, Trier 54296, Germany)

  • Shuonan Yuan

    (Department of Finance and Economics, School of Management, Xi’an Polytechnic University, Xi’an 710048, China)

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.

Suggested Citation

  • Minh Hai Ngo & Marc Oliver Rieger & Shuonan Yuan, 2018. "The Fundamental Equity Premium and Ambiguity Aversion in an International Context," Risks, MDPI, vol. 6(4), pages 1-24, November.
    • Handle: RePEc:gam:jrisks:v:6:y:2018:i:4:p:128-:d:181012
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