Related papers: Exact Value Solution to the Equity Premium Puzzle
The article's aim is to provide a solution to the equity premium puzzle with a derived model. The derived model which depends on Consumption Capital Asset Pricing Model gives a solution to the puzzle with the values of coefficient of…
This study provides the solution to the equity premium puzzle. The new model was developed by including the behavior of investors toward risk in financial markets in prior studies. The calculations of this newly tested model show that the…
This study provides a solution of the equity premium puzzle. Questioning the validity of the Arrow-Pratt measure of relative risk aversion for detecting the risk behavior of investors under all conditions, a new tool, that is, the…
This paper considers the optimal portfolio selection problem in a dynamic multi-period stochastic framework with regime switching. The risk preferences are of exponential (CARA) type with an absolute coefficient of risk aversion which…
The equity risk premium puzzle is that the return on equities has far exceeded the average return on short-term risk-free debt and cannot be explained by conventional representative-agent consumption based equilibrium models. We review a…
We derive a closed-form expression capturing the degree of Relative Risk Aversion (RRA) of investors for non-"fair" lotteries. We argue that our formula is superior to earlier methods that have been proposed, as it is a function of only…
Equity risk premium is a central component of every risk and return model in finance and a key input to estimate costs of equity and capital in both corporate finance and valuation. An article by Damodaran examines three broad approaches…
By analysing the restrictions that ensure the existence of capital market equilibrium, we show that the coefficient of relative risk aversion and the subjective discount factor cannot be high simultaneously as they are supposed to be to…
Equity premium, the surplus returns of stocks over bonds, has been an enduring puzzle. While numerous prior works approach the problem assuming the utility of money is invariant across contexts, our approach implies that in efficient…
Financial portfolios are often optimized for maximum profit while subject to a constraint formulated in terms of the Conditional Value-at-Risk (CVaR). This amounts to solving a linear problem. However, in its original formulation this…
In this paper, we revisit the equity premium puzzle reported in 1985 by Mehra and Prescott. We show that the large equity premium that they report can be explained by choosing a more appropriate distribution for the return data. We…
We construct the term structure of the (forward-looking, US market) equity risk premium from SPX option chains. The method is "model-light". Risk-neutral probability densities are estimated by fitting $N$-component Gaussian mixture models…
We consider a liquidation problem in which a risk-averse trader tries to liquidate a fixed quantity of an asset in the presence of market impact and random price fluctuations. The trader encounters a trade-off between the transaction costs…
Conditional value-at-risk (CVaR) is a prominent risk measure in financial engineering, energy systems, and supply chain management. In these domains, Markov decision processes (MDPs) with a long-run CVaR criterion effectively mitigate cost…
We study risk-sensitive reinforcement learning in finite discounted MDPs with recursive entropic risk measures (ERM), where the risk parameter $\beta \neq 0$ controls the agent's risk attitude: $\beta>0$ for risk-averse and $\beta<0$ for…
In real-world scenarios, risk-averse learning is valuable for mitigating potential adverse outcomes. However, the delayed feedback makes it challenging to assess and manage risk effectively. In this paper, we investigate risk-averse…
We study portfolio selection in a complete continuous-time market where the preference is dictated by the rank-dependent utility. As such a model is inherently time inconsistent due to the underlying probability weighting, we study the…
This paper investigates a novel behavioral feature of recursive preferences: aversion to risks that persist over time, or simply \textit{correlation aversion}. Greater persistence provides information about future consumption but reduces…
CVaR (Conditional Value at Risk) is a risk metric widely used in finance. However, dynamically optimizing CVaR is difficult since it is not a standard Markov decision process (MDP) and the principle of dynamic programming fails. In this…
We investigate a framework for robo-advisors to estimate non-expert clients' risk aversion using adaptive binary-choice questionnaires. We model risk aversion using cost functions and spectral risk measures in a static setting. We prove the…