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The Equity Premium Puzzle, Ambiguity Aversion, and Institutional Quality

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  • Abbas Mirakhor
  • S. Nuri Erbas

Abstract

With cross-section data from 53 emerging and mature markets, we provide evidence that equity premium puzzle is a global phenomenon. In addition to risk aversion, equity premium may reflect ambiguity aversion. We explore the sources of equity premium using some pertinent fundamental independent variables, as well as the World Bank institutional quality indexes and other proxies for the degree of ambiguity in the sample countries. Some World Bank and other indexes are statistically significant, which indicates that a large part of equity premium may reflect investor aversion to ambiguities resulting from institutional weaknesses.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/230.

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Length: 58
Date of creation: 01 Sep 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/230

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Keywords: Risk premium; Stock prices; bond; probability; correlation; stock market; bond market; bond market capitalization; government bond; equity market; government bond yield; bond yield; probabilities; correlations; independent variables; survey; bonds; sample size; standard deviation; stock returns; deposit rate; financial markets; surveys; explanatory power; sample sizes; equation; samples; statistics; financial stability; stock market index; bond return; international country risk guide; financial system; equations; simulation results; stock markets; stock price; denominated bonds; money market rate; missing data; bond rate; hedge; bond index; indexed bonds; financial market development; financial market; financial instruments; cash flows; money market; stock market indexes; treasury bond; asset markets; stock market development; corporate cash flows; sample mean; deposit money banks; financial globalization; stock price volatility; hedge funds; government bonds; government bond index; international financial statistics; financial sector development; portfolio evaluation; bond markets; international bonds; financial statistics; deposit money; stock market volatility; sovereign bonds; equity markets; bond returns; standard deviations; random error; financial sector; portfolio investment;

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References

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Citations

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Cited by:
  1. Isaac Kleshchelski & Nicolas Vincent, 2007. "Robust Equilibrium Yield Curves," Cahiers de recherche 08-02, HEC Montréal, Institut d'économie appliquée.
  2. Casper van Ewijk & C. Santing, 2010. "A meta-analysis of the equity premium," CPB Discussion Paper 156, CPB Netherlands Bureau for Economic Policy Analysis.
  3. Yehuda Izhakian, 2012. "Ambiguity Measurement," Working Papers 12-01, New York University, Leonard N. Stern School of Business, Department of Economics.

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