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The Effect of Pessimism and Doubt on the Equity Premium

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  • Alfranseder, Emanuel

    (Knut Wicksell Centre for Financial Studies, Lund University)

  • zhang, Xiang

    (Knut Wicksell Centre for Financial Studies, Lund University)

Abstract

This paper introduces a model to explain the equity-premium puzzle. Consumers exhibit both pessimism and doubt. Consumers are pessimistic if their beliefs about the dividend are a translation of the objective dividend by an independent and identically distributed normal random variable with negative mean. Consumers exhibit doubt if their beliefs are a translation of the objective dividend by an independent and identically distributed normal random variable with mean zero. A cross-sectional empirical study using the SHARE database explores the differences between various European countries in terms of pessimism and doubt and tests the theoretical model empirically.

Suggested Citation

  • Alfranseder, Emanuel & zhang, Xiang, 2015. "The Effect of Pessimism and Doubt on the Equity Premium," Knut Wicksell Working Paper Series 2015/5, Lund University, Knut Wicksell Centre for Financial Studies.
    • Handle: RePEc:hhs:luwick:2015_005
    Note: Full text versions of the paper: http://www.lusem.lu.se/media/kwc/working-papers/2015/ny_wp_2015_5_emanuel_xiang_web.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Behavioral Finance; Equity Premium; Doubt; Pessimism;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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