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The equity premium puzzle and emotional asset pricing

[working paper]

Gürtler, Marc; Hartmann, Nora

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Corporate Editor Technische Universität Braunschweig, Department Wirtschaftswissenschaften, Institut für Finanzwirtschaft
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. U.S. 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 (1985) 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/Huang/Santos (2001) already showed that limited rational investors demand a high equity premium. But as opposed to them, our approach additionally supports dividend smoothing." (author's abstract)
Keywords economy; stock exchange; stock market; Federal Republic of Germany; research; empirical research; equity
Classification Economic Policy
Document language English
Publication Year 2004
City Braunschweig
Page/Pages 28 p.
Series IF Working Paper Series, FW10V3
Licence Deposit Licence - No Redistribution, No Modifications
data provider This metadata entry was indexed by the Special Subject Collection Social Sciences, USB Cologne