Institutions and Asset Returns

Heng-Fu Zou ()

No 778, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

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.

Pages: 13 pages
Date: 2025-08-08
New Economics Papers: this item is included in nep-fdg, nep-inv and nep-mac
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