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Equity Premium Puzzle: The Distributional Approach

In: Encyclopedia of Finance

Author

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  • Nadezhda Safronova

    (University of Karlsruhe)

Abstract

This chapter provides an extensive review of research on the equity premium puzzle, providing an overview of the existing approaches to this problem. We then propose an alternative approach including the application of the stable distribution. We analyze a portfolio optimization problem, under the assumption of normal (Gaussian) and stable (non-Gaussian) distributed asset returns. We examine and compare the results of portfolio allocations obtained in normal and stable cases. Finally, we investigate the ratio between the coefficients of risk aversion in normal and stable cases.

Suggested Citation

  • Nadezhda Safronova, 2022. "Equity Premium Puzzle: The Distributional Approach," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 58, pages 1345-1372, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-91231-4_58
    DOI: 10.1007/978-3-030-91231-4_58
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