Equity Premium Puzzle: The Distributional Approach

Nadezhda Safronova ()
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Nadezhda Safronova: University of Karlsruhe

Chapter 58 in Encyclopedia of Finance, 2022, pp 1345-1372 from Springer

Abstract: Abstract This chapter provides an extensive review of research on the equity premium puzzle, providing an overview of the existing approaches to this problem. We then propose an alternative approach including the application of the stable distribution. We analyze a portfolio optimization problem, under the assumption of normal (Gaussian) and stable (non-Gaussian) distributed asset returns. We examine and compare the results of portfolio allocations obtained in normal and stable cases. Finally, we investigate the ratio between the coefficients of risk aversion in normal and stable cases.

Keywords: Asset pricing; Equity premium puzzle; Habit formation; Preferences; Return distribution; Risk aversion; Stable distribution (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-91231-4_58

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DOI: 10.1007/978-3-030-91231-4_58

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