This paper concerns the distributional assumptions made on stock returns in the myopic loss aversion (MLA) proposed explanation to the equity premium puzzle. While Benartzi and Thaler (1995) assume temporal independence in these returns, we introduce a more realistic assumption incorporating conditional heteroskedasticity. This involves the work on temporal aggregation of GARCH processes of Drost and Nijman (1993). Using Swedish data, our estimation method produces an overall larger evaluation period than the one originally obtained by Benartzi and Thaler, e.g., over the sample period July 1961 through December 2003 the evaluation period increases from 12 to 17. This shows that MLA indeed can explain a large equity premium but, also, that the model is sensitive to the distributional assumption made on stock returns.
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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number
2005:11.
Length: 34 pages Date of creation: 21 Jan 2005 Date of revision: Handle: RePEc:hhs:uunewp:2005_011
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Campbell, John Y., 2003.
"Consumption-based asset pricing,"
Handbook of the Economics of Finance,
in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887
Elsevier.
[Downloadable!] (restricted)
Andrew Ang & Geert Bekaert & Jun Liu, 2000.
"Why Stocks May Disappoint,"
NBER Working Papers
7783, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
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