Macro Consumption and Equity Premium Based Risk Aversion of Labor and Capitalists

2010 ◽  
Author(s):  
Casper G. de Vries ◽  
Jorn Zenhorst
Keyword(s):  
Risk Aversion ◽  
Equity Premium

scholarly journals Solution to the Equity Premium Puzzle

2021 ◽  
Author(s):  
Atilla Aras
Keyword(s):  
Relative Risk ◽  
Risk Aversion ◽  
Risk Behavior ◽  
Empirical Studies ◽  
Equity Premium ◽  
Subjective Time ◽  
Relative Risk Aversion ◽  
Equity Premium Puzzle ◽  
Time Discount ◽  
Premium Puzzle

This study provides a solution of the equity premium puzzle. Questioning the validity of the Arrow-Pratt measure of relative risk aversion for detecting the risk behavior of investors, a new tool in the form of the sufficiency factor of the model was developed to analyze the risk behavior of investors. The calculations of this newly tested model show that the value of the coefficient of relative risk aversion is 1.033526 by assuming the value of the subjective time discount factor as 0.99. Since these values are compatible with the existing empirical studies, they confirm the validity of the newly derived model that provides a solution to the equity premium puzzle.

The Uncertainty Premium in an Ambiguous Economy

2011 ◽  
Vol 01 (02) ◽  
pp. 323-354 ◽  
Author(s):  
Yehuda Izhakian ◽  
Simon Benninga
Keyword(s):  
Risk Aversion ◽  
Risk Premium ◽  
Equity Premium ◽  
Equity Premium Puzzle ◽  
Smooth Model ◽  
Increasing Risk ◽  
Premium Puzzle ◽  
Additional Explanation

The uncertainty premium is the premium that is derived from not knowing the sure outcome (risk premium) and from not knowing the precise odds of outcomes (ambiguity premium). We generalize Pratt's risk premium to uncertainty premium based on Klibanoff et al.'s (2005) smooth model of ambiguity. We show that the uncertainty premium can decrease with an increase in decision maker's risk aversion. This happens because increasing risk aversion always results in a lower ambiguity premium. The positive ambiguity premium may provide an additional explanation to the equity premium puzzle.

Minimum funding ratios for defined-benefit pension funds

2010 ◽  
Vol 10 (3) ◽  
pp. 417-434 ◽  
Author(s):  
ARJEN SIEGMANN
Keyword(s):  
Risk Aversion ◽  
Expected Utility ◽  
Pension Fund ◽  
Equity Premium ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Intergenerational Solidarity ◽  
Defined Contribution ◽  
Power Utility ◽  
Time Diversification

AbstractWe compute minimum nominal funding ratios for defined-benefit (DB) plans based on the expected utility that can be achieved in a defined-contribution (DC) pension scheme. Using Monte Carlo simulation, expected utility is computed for three different specifications of utility: power utility, mean-shortfall, and mean-downside deviation. Depending on risk aversion and the level of sophistication assumed for the DC scheme, minimum acceptable funding ratios are between 0.87 and 1.20 in nominal terms. For relative risk aversion of 5 and a DC scheme with a fixed-contribution setup, the minimum nominal funding ratio is between 0.87 and 0.98. The attractiveness of the DB plan increases with the expected equity premium and the fraction invested in stocks. We conclude that the expected value of intergenerational solidarity, providing time-diversification to its participants, can be large. Minimum funding ratios in real (inflation-adjusted) terms lie between 0.56 and 0.79. Given a DB pension fund with a funding ratio of 1.30, a participant in a DC plan has to pay a 2.7 to 6.1% point higher contribution on average to achieve equal expected utility.

scholarly journals World Equity Premium Based Risk Aversion Estimates

2010 ◽  
Author(s):  
Lorenzo Pozzi ◽  
Casper De Vries ◽  
Jorn Zenhorst
Keyword(s):  
Risk Aversion ◽  
Equity Premium

Age‐Dependent Increasing Risk Aversion and the Equity Premium Puzzle

2019 ◽  
Vol 54 (2) ◽  
pp. 377-412 ◽  
Author(s):  
Amadeu DaSilva ◽  
Mira Farka ◽  
Christos Giannikos
Keyword(s):  
Risk Aversion ◽  
Equity Premium ◽  
Equity Premium Puzzle ◽  
Age Dependent ◽  
Increasing Risk ◽  
Premium Puzzle

scholarly journals Ambiguity Aversion and the Variance Premium

2019 ◽  
Vol 09 (02) ◽  
pp. 1950003 ◽  
Author(s):  
Jianjun Miao ◽  
Bin Wei ◽  
Hao Zhou
Keyword(s):  
Risk Aversion ◽  
Ambiguity Aversion ◽  
Equity Premium ◽  
Return Variance ◽  
Quantitative Performance ◽  
The Mean ◽  
The Difference ◽  
Risk Free Rate ◽  
Mean Variance ◽  
Free Rate

This paper offers an ambiguity-based interpretation of the variance premium — the difference between risk-neutral and objective expectations of market return variance — as a compounding effect of both belief distortion and variance differential regarding the uncertain economic regimes. Our calibrated model can match the variance premium, the equity premium, and the risk-free rate in the data. We find that about 97% of the mean–variance premium can be attributed to ambiguity aversion. A three-way separation among ambiguity aversion, risk aversion, and intertemporal substitution, permitted by the smooth ambiguity preferences, plays a key role in our model’s quantitative performance.

scholarly journals Anomalies: The Equity Premium Puzzle

1997 ◽  
Vol 11 (1) ◽  
pp. 191-200 ◽  
Author(s):  
Jeremy J Siegel ◽  
Richard H Thaler
Keyword(s):  
Risk Aversion ◽  
Equity Premium ◽  
Fixed Income ◽  
Fixed Income Securities ◽  
Treasury Bills ◽  
Long Time ◽  
Survivorship Bias ◽  
Time Periods ◽  
The Difference ◽  
Premium Puzzle

The equity premium is the difference in returns between equities and fixed income securities, such as Treasury bills. The puzzle refers to the fact that the premium has historically been very large--about 6 percent per year--too large to be easily explained by risk aversion. The authors document the evidence for the puzzle and find that is exists in many countries, over long time periods, and does not seem to be explained by survivorship bias. They also summarize several theoretical explanations. The authors conclude that it is difficult to explain the equity premium without incorporating some kind of irrationality.

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