A Unied Bayesian Theory of Equity Puzzles
نویسنده
چکیده
In standard expositions of the equity premium, risk-free rate, and excess volatility puzzles, the subjective distribution of future growth rates has its mean and variance calibrated to past sample averages. This paper shows that proper Bayesian estimation of uncertain structural growth parameters introduces an irreducible fat-tailed background uncertainty that can explain all three puzzles parsimoniously by one uni ed theory. The Bayesian statistical-economic equilibrium has just one degree of freedom, yet all three values of the equity premium, risk-free rate, and excess volatility derived from the model match simultaneously the stylized facts observed in the time-series data.
منابع مشابه
Subjective Expectations and Asset-Return Puzzles
Three major puzzles, described later in this section, have captured the attention of macroeconomic finance: the equity-premium, riskfreerate and equity-volatility puzzles. A common strand of these three asset-return puzzles is that markets are behaving as if investors fear some unknown hidden randomness that isn’t obvious from the data. People are acting in the aggregate like there is much more...
متن کاملThe equity premium puzzle and emotional asset pricing
Since the equity premium as well as the risk-free rate puzzle question the concepts central to financial and economic modeling, we apply behavioral decision theory to asset pricing in view of solving these puzzles. U.S. stock market data for the period 1960-2003 and German stock market data for the period 1977-2003 show that emotional investors who act in accordance to Bell's (1985) disappointm...
متن کاملA Unied Bayesian Decision Theory
This paper provides new foundations for Bayesian Decision Theory based on a representation theorem for preferences de ned on a set of prospects containing both factual and conditional possibilities. This use of a rich set of prospects not only provides a framework within which the main theoretical claims of Savage, Ramsey, Je¤rey and others can be stated and compared, but also allows for the po...
متن کاملWisconsin Law Review Symposium : Intergenerational Equity and Intellectual Property Nov
Matthew Adler University of Pennsylvania Law School “Intergenerational Equity: Puzzles for Welfarists” This presentation will survey the issue of intergenerational equity from the perspective of welfarismthe normative framework undergirding welfare economics, and one also employed in much philosophical work on future generations, such as Derek Parfit's path-breaking analysis in Reasons and Pers...
متن کاملRisk, Uncertainty, and Asset-Pricing Puzzles
In conventional rational expectations expositions of the equity premium puzzle, riskfree rate puzzle, and variability mismatch puzzle,the subjective distribution of future growth rates is essentially made to mimic its past sample moments. This paper shows that the unobservable nature of structural growth parameters adds to expectation beliefs a permanent thick-tailed background layer of u...
متن کامل