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Institutions and Asset Returns

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  • Heng-fu Zou

Abstract

Why do equity markets in some countries consistently outperform while others suffer from chronic underperformance, volatility, and investor distrust? Why has the canonical equity premium puzzle-first posed by Mehra and Prescott (1985)-remained unresolved despite decades of re finement in consumption-based, production-based, and behavioral asset pricing models? This paper offers a foundational answer: institutions are the missing capital. We argue that differences in institutional quality - such as the strength of property rights, legal enforcement, political stability, democratic accountability, and regulatory claritysystematically shape both the level and volatility of asset returns across countries and time.

Suggested Citation

  • Heng-fu Zou, 2025. "Institutions and Asset Returns," CEMA Working Papers 778, China Economics and Management Academy, Central University of Finance and Economics.
    • Handle: RePEc:cuf:wpaper:778
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    1. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    2. Heng-fu Zou, 2025. "Institution-Based Asset Pricing: A Generalization of Consumption- and Production-Based Models," CEMA Working Papers 765, China Economics and Management Academy, Central University of Finance and Economics.
    3. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    4. Robert J. Barro, 1998. "Determinants of Economic Growth: A Cross-Country Empirical Study," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522543, December.
    5. Oliver E. Williamson, 2000. "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 595-613, September.
    6. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(2), pages 645-700.
    7. Heng-fu Zou, 2025. "Institutional Volatility and the Equity Premium Puzzle: A Dynamic Asset Pricing Framework for OECD Economies," CEMA Working Papers 775, China Economics and Management Academy, Central University of Finance and Economics.
    8. Minxian Sun & Heng-Fu Zou, 2025. "A Macroeconomic Model with Property-Rights Capital," Annals of Economics and Finance, Society for AEF, vol. 26(1), pages 213-246, May.
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