IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v10y2007i06ns0219024907004500.html
   My bibliography  Save this article

The Equity Premium Puzzle And Emotional Asset Pricing

Author

Listed:
  • MARC GÜRTLER

    (Department of Finance, Braunschweig University of Technology, Abt-Jerusalem-Str. 7, Braunschweig, Germany)

  • NORA HARTMANN

    (McKinsey & Company, Hamburg, Germany)

Abstract

Since the equity premium as well as the risk-free rate puzzle question the concepts central to financial and economic modeling, we apply behavioral decision theory to asset pricing in view of solving these puzzles. US stock market data for the period 1960–2003 and German stock market data for the period 1977–2003 show that emotional investors who act in accordance to Bell's [6] disappointment theory — a special case of prospect theory — and additionally administer mental accounts demand a high equity premium. Furthermore, these investors reason a low risk-free rate. However, Barberis et al. [5] already showed that limited rational investors demand a high equity premium. But as opposed to them, our approach additionally supports dividend smoothing.

Suggested Citation

  • Marc Gürtler & Nora Hartmann, 2007. "The Equity Premium Puzzle And Emotional Asset Pricing," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(06), pages 939-965.
    • Handle: RePEc:wsi:ijtafx:v:10:y:2007:i:06:n:s0219024907004500
    DOI: 10.1142/S0219024907004500
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024907004500
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024907004500?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bryan R. Routledge & Stanley E. Zin, 2010. "Generalized Disappointment Aversion and Asset Prices," Journal of Finance, American Finance Association, vol. 65(4), pages 1303-1332, August.
    2. Brav, Alon & Graham, John R. & Harvey, Campbell R. & Michaely, Roni, 2005. "Payout policy in the 21st century," Journal of Financial Economics, Elsevier, vol. 77(3), pages 483-527, September.
    3. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gürtler, Marc & Hartmann, Nora, 2004. "The equity premium puzzle and emotional asset pricing," Working Papers FW10V3, Technische Universität Braunschweig, Institute of Finance.
    2. Paolo Guasoni & Gur Huberman & Dan Ren, 2020. "Shortfall aversion," Mathematical Finance, Wiley Blackwell, vol. 30(3), pages 869-920, July.
    3. Nandkumar Nayar & Ajai K. Singh & Allan A. Zebedee, 2008. "Share Repurchase Offers and Liquidity: An Examination of Temporary and Permanent Effects," Financial Management, Financial Management Association International, vol. 37(2), pages 251-270, June.
    4. Fidrmuc, Jana P. & Jacob, Marcus, 2010. "Culture, agency costs, and dividends," Journal of Comparative Economics, Elsevier, vol. 38(3), pages 321-339, September.
    5. Avanidhar Subrahmanyam, 2008. "Behavioural Finance: A Review and Synthesis," European Financial Management, European Financial Management Association, vol. 14(1), pages 12-29, January.
    6. Fayez A. Elayan & Jingyu Li & Maureen E. Donnelly & Allister W. Young, 2009. "Changes to Income Trust Taxation in Canada: Investor Reaction and Dividend Clientele Theory," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5-6), pages 725-753.
    7. Abe de Jong & Henry van Beusichem, 2009. "The changing role of dividend policies: an empirical analysis for the Netherlands 1945-2006," Working Papers 9024, Economic History Society.
    8. Huang-Meier, Winifred & Freeman, Mark C., 2015. "Aggregate dividends and consumption smoothing," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 324-335.
    9. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2014. "Does local financial development matter for firm lifecycle in India ?," Policy Research Working Paper Series 7008, The World Bank.
    10. Siddiqi, Hammad, 2015. "Anchoring and Adjustment Heuristic: A Unified Explanation for Equity Puzzles," MPRA Paper 68729, University Library of Munich, Germany.
    11. Darren Bernard & Elsa Maria Juliani & Alastair Lawrence, 2024. "Can executives predict how firm news maps to stock price? A field study at the onset of COVID-19," Review of Accounting Studies, Springer, vol. 29(4), pages 3176-3217, December.
    12. Ali, Heba & Hegazy, Aya Yasser, 2022. "Dividend policy, risk and the cross-section of stock returns: Evidence from India," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 169-192.
    13. Fuller, Kathleen P., 2003. "The impact of informed trading on dividend signaling: a theoretical and empirical examination," Journal of Corporate Finance, Elsevier, vol. 9(4), pages 385-407, September.
    14. Imen Ghadhab, 2023. "Bonding, signaling theory and dividend policy: Evidence from multinational firms," Journal of Asset Management, Palgrave Macmillan, vol. 24(1), pages 69-83, February.
    15. Gareis, Johannes & Mayer, Eric, 2020. "Financial shocks and the relative dynamics of tangible and intangible investment: Evidence from the euro area," Discussion Papers 39/2020, Deutsche Bundesbank.
    16. Zhao, Na & Zhang, Lin & Huang, Hui, 2025. "Influence of China's geopolitical risk on corporate dividend policies," Finance Research Letters, Elsevier, vol. 72(C).
    17. Eckhard Platen, 2005. "An Alternative Interest Rate Term Structure Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(06), pages 717-735.
    18. Smietanka, Pawel & Bloom, Nicholas & Mizen, Paul, 2018. "Business investment, cash holding and uncertainty since the Great Financial Crisis," Bank of England working papers 753, Bank of England.
    19. Daniel A. Bens, 2006. "Discussion of Accounting Discretion in Fair Value Estimates: An Examination of SFAS 142 Goodwill Impairments," Journal of Accounting Research, Wiley Blackwell, vol. 44(2), pages 289-296, May.
    20. Thomas McCluskey & Aoife Broderick & Amanda Boyle & Bruce Burton & David Power, 2010. "Evidence on Irish financial analysts' and fund managers' views about dividends," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 2(2), pages 80-99, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:10:y:2007:i:06:n:s0219024907004500. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.