Risk, ambiguity, and equity premium: International evidence

Eung-Bin Kim and Suk-Joon Byun

International Review of Economics & Finance, 2021, vol. 76, issue C, 321-335

Abstract: We empirically examine the relation between risk, ambiguity, and market equity premium in 21 international stock markets. After estimating each country's degree of ambiguity from intraday data of iShares country ETFs (exchange-traded funds), we find a positive risk-return tradeoff. Investors' attitudes toward ambiguity is conditional on their expectations of probability of gains, but its relationship is nonlinear. This nonlinearity in ambiguity premium is more prominent in emerging markets. Additionally, we conduct a cross-country analysis, which shows that cross-country variations in cultural and institutional factors affect investors' behavior. Our international evidence supports that ambiguity alongside risk are the key determinants of investors' decision-making.

Keywords: Equity premium; Ambiguity; Risk-return tradeoff; International stock market (search for similar items in EconPapers)
JEL-codes: D53 D81 G11 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:76:y:2021:i:c:p:321-335

DOI: 10.1016/j.iref.2021.06.002

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