The Equity Premium Puzzle, Ambiguity Aversion, and Institutional Quality

September 1, 2007

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Emerging and frontier financial markets, Financial institutions, Financial markets, Market capitalization, Securities markets, Stock markets, Stocks

Keywords: Ambiguity Aversion, asset return, Emerging and frontier financial markets, equity premium, equity returns up, Global, Market capitalization, return differential, Risk and Knightian Uncertainty, Securities markets, Stock markets, stock return, Stocks, WP

Pages:
58
Volume:
2007
DOI:
https://doi.org/10.5089/9781451867947.001
Issue:
230
Series:
Working Paper No. 2007/230
Stock No:
WPIEA2007230
ISBN:
9781451867947
ISSN:
1018-5941

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