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Equity Premium Puzzle, Prospect Theory and Subprime Crisis

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  • Mouna Abdelhédi-Zouch
  • Mouna Boujelbène Abbes
  • Younès Boujelbène

Abstract

The equity premium puzzle is one of the most important phenomena in finance. Related to behavioral finance, we use the concept of Myopic Loss Aversion (MLA) to explain the puzzle in developed and emerging markets. Empirically, we support the robustness of the positive equity premium across the most developed and emerging markets before the subprime crisis. However, the equity premium becomes negative during the subprime crisis, except for the financial markets of Hong Kong, India and Tunisia. Using a simulation method, we find that myopic emerging and developed market investors evaluate their portfolios annually. Furthermore, the optimal stocks allocation by myopic loss-averse investors is higher in emerging markets than in the developed markets.

Suggested Citation

  • Mouna Abdelhédi-Zouch & Mouna Boujelbène Abbes & Younès Boujelbène, 2012. "Equity Premium Puzzle, Prospect Theory and Subprime Crisis," The IUP Journal of Applied Finance, IUP Publications, vol. 18(2), pages 19-36, April.
    • Handle: RePEc:icf:icfjaf:v:18:y:2012:i:2:p:19-36
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    Cited by:

    1. Mouna Abdelhédi-Zouch & Mouna Boujelbène Abbes & Younès Boujelbène, 2015. "Volatility Spillover And Investor Sentiment: Subprime Crisis," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 11(2), pages 83-101.

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