The Equity Premium Puzzle, Ambiguity Aversion, and Institutional Quality

Abbas Mirakhor and S. Erbas

No 2007/230, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; equity premium; stock return; asset return; return differential; equity returns up; Risk and Knightian Uncertainty; Ambiguity Aversion; Stocks; Stock markets; Emerging and frontier financial markets; Market capitalization; Securities markets; Global (search for similar items in EconPapers)
Pages: 58
Date: 2007-09-01
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Citations: View citations in EconPapers (20)

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