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Oren Sussman - One of the best experts on this subject based on the ideXlab platform.

  • Habit formation and the Equity–Premium Puzzle: a skeptical view
    Annals of Finance, 2007
    Co-Authors: Stefano G. Athanasoulis, Oren Sussman
    Abstract:

    We argue that, ceteris paribus , introducing a habit that resolves the Equity–Premium Puzzle is equivalent to increasing the Arrow-Pratt coefficient of relative risk aversion, AP-RRA. If we constrain the AP-RRA to a constant ‘acceptable’ level, the effect on the Equity Premium is quantitatively insignificant. In a dynamic setting, the fluctuations of the habit increase the Equity Premium, slightly, though generates unrealistic fluctuations in the risk-free interest rate. We conclude a habit is observationally equivalent, up to a first-order approximation, to a higher AP-RRA and to a preference shock. These effects cannot resolve the Equity–Premium Puzzle.

  • habit formation and the Equity Premium Puzzle a skeptical view
    Annals of Finance, 2007
    Co-Authors: Stefano G. Athanasoulis, Oren Sussman
    Abstract:

    We argue that, ceteris paribus, introducing a habit that resolves the Equity–Premium Puzzle is equivalent to increasing the Arrow-Pratt coefficient of relative risk aversion, AP-RRA. If we constrain the AP-RRA to a constant ‘acceptable’ level, the effect on the Equity Premium is quantitatively insignificant. In a dynamic setting, the fluctuations of the habit increase the Equity Premium, slightly, though generates unrealistic fluctuations in the risk-free interest rate. We conclude a habit is observationally equivalent, up to a first-order approximation, to a higher AP-RRA and to a preference shock. These effects cannot resolve the Equity–Premium Puzzle.

Stefano G. Athanasoulis - One of the best experts on this subject based on the ideXlab platform.

  • Habit formation and the Equity–Premium Puzzle: a skeptical view
    Annals of Finance, 2007
    Co-Authors: Stefano G. Athanasoulis, Oren Sussman
    Abstract:

    We argue that, ceteris paribus , introducing a habit that resolves the Equity–Premium Puzzle is equivalent to increasing the Arrow-Pratt coefficient of relative risk aversion, AP-RRA. If we constrain the AP-RRA to a constant ‘acceptable’ level, the effect on the Equity Premium is quantitatively insignificant. In a dynamic setting, the fluctuations of the habit increase the Equity Premium, slightly, though generates unrealistic fluctuations in the risk-free interest rate. We conclude a habit is observationally equivalent, up to a first-order approximation, to a higher AP-RRA and to a preference shock. These effects cannot resolve the Equity–Premium Puzzle.

  • habit formation and the Equity Premium Puzzle a skeptical view
    Annals of Finance, 2007
    Co-Authors: Stefano G. Athanasoulis, Oren Sussman
    Abstract:

    We argue that, ceteris paribus, introducing a habit that resolves the Equity–Premium Puzzle is equivalent to increasing the Arrow-Pratt coefficient of relative risk aversion, AP-RRA. If we constrain the AP-RRA to a constant ‘acceptable’ level, the effect on the Equity Premium is quantitatively insignificant. In a dynamic setting, the fluctuations of the habit increase the Equity Premium, slightly, though generates unrealistic fluctuations in the risk-free interest rate. We conclude a habit is observationally equivalent, up to a first-order approximation, to a higher AP-RRA and to a preference shock. These effects cannot resolve the Equity–Premium Puzzle.

Ian Garrett - One of the best experts on this subject based on the ideXlab platform.

Anisha Ghosh - One of the best experts on this subject based on the ideXlab platform.

  • Can Rare Events Explain the Equity Premium Puzzle
    Review of Financial Studies, 2012
    Co-Authors: Christian Julliard, Anisha Ghosh
    Abstract:

    Probably not. First, allowing the probabilities of the states of the economy to differ from their sample frequencies, the consumption-CAPM is still rejected in both U.S. and international data. Second, the recorded world disasters are too small to rationalize the Puzzle, unless one assumes that disasters occur every 6--10 years. Third, if the data were generated by the rare events distribution needed to rationalize the Equity Premium Puzzle, the Puzzle itself would be unlikely to arise. Fourth, the rare events hypothesis, by reducing the cross-sectional dispersion of consumption risk, worsens the ability of the consumption-CAPM to explain the cross-section of returns. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

  • Can Rare Events Explain the Equity Premium Puzzle
    SSRN Electronic Journal, 2008
    Co-Authors: Christian Julliard, Anisha Ghosh
    Abstract:

    Probably not. First, allowing the probabilities of the states of the economy to differ from their sample frequencies, the Consumption-CAPM is still rejected in both U.S. and international data. Second, the recorded world disasters are too small to rationalize the Puzzle unless one assumes that disasters occur every 6-10 years. Third, if the data were generated by the rare events distribution needed to rationalize the Equity Premium Puzzle, the Puzzle itself would be unlikely to arise. Fourth, the rare events hypothesis, by reducing the cross-sectional dispersion of consumption risk, worsens the ability of the Consumption-CAPM to explain the cross-section of returns.

  • Can Rare Events Explain the Equity Premium Puzzle
    2008
    Co-Authors: Anisha Ghosh, Christian Julliard
    Abstract:

    Probably not. First, allowing the probabilities attached to the states of the economy to differ from their sample frequencies, the Consumption-CAPM is still rejected by the data and requires a very high level of Relative Risk Aversion (RRA) in order to rationalize the stock market risk Premium. This result holds for a variety of data sources and samples -- including ones starting as far back as 1890. Second, we elicit the likelihood of observing an Equity Premium Puzzle (EPP) if the data were generated by the rare events probability distribution needed to rationalize the Puzzle with a low level of RRA. We find that the historically observed EPP would be very unlikely to arise. Third, we find that the rare events explanation of the EPP significantly worsens the ability of the Consumption-CAPM to explain the cross-section of asset returns. This is due to the fact that, by assigning higher probabilities to bad -- economy wide -- states in which consumption growth is low and all the assets in the cross-section tend to yield low returns, the rare events hypothesis reduces the cross-sectional dispersion of consumption risk relative to the cross-sectional variation of average returns.

Katya Kartashova - One of the best experts on this subject based on the ideXlab platform.

  • Private Equity Premium Puzzle Revisited
    American Economic Review, 2014
    Co-Authors: Katya Kartashova
    Abstract:

    In this paper, I extend the results of Moskowitz and Vissing-Jorgensen (2002) on the returns to entrepreneurial investments in the United States. First, following the authors’ methodology I replicate the original findings from the Survey of Consumer Finances (SCF) for the period 1989–1998 and show that the returns to private and public Equity are similar. I then extend the period under consideration using data from subsequently released waves of SCF 2001, 2004, and 2007 and assess the robustness of their results to this extension. I find that the “private Equity Premium Puzzle” is not a robust feature of the data and does not survive beyond the period of high public Equity returns in the 1990s. In particular, returns to entrepreneurial Equity remain largely unaffected when public Equity returns plunge to near zero values between 1999 and 2001. The average return to private Equity exceeds public Equity return in 1999-2007 and for the period 1989-2007 as a whole. To validate the results, I provide alternative measures of private Equity returns in the data.