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Can ambiguity aversion solve the equity premium puzzle? Survey evidence from international data

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  • Rieger, Marc Oliver
  • Wang, Mei

Abstract

Ambiguity aversion has been suggested as a potential explanation for the equity premium puzzle in recent theoretical models. To test this hypothesis, we measure the amount of ambiguity aversion in a large-scale international survey. A comparison to the average equity premia in these countries demonstrates that ambiguity aversion does, indeed, have a significant influence on the amount of equity risk premium, even when controlling for macroeconomic parameters. Finally, we connect differences in ambiguity aversion to differences in uncertainty avoidance, one of Hofstede’s cultural dimensions.

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  • Rieger, Marc Oliver & Wang, Mei, 2012. "Can ambiguity aversion solve the equity premium puzzle? Survey evidence from international data," Finance Research Letters, Elsevier, vol. 9(2), pages 63-72.
    • Handle: RePEc:eee:finlet:v:9:y:2012:i:2:p:63-72
    DOI: 10.1016/j.frl.2012.02.001
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    3. Jeleva, Meglena & Tallon, Jean-Marc, 2016. "Ambiguïté, comportements et marchés financiers," L'Actualité Economique, Société Canadienne de Science Economique, vol. 92(1-2), pages 351-383, Mars-Juin.
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    5. Marc Oliver Rieger & Thorsten Hens & Mei Wang, 2013. "International Evidence on the Equity Premium Puzzle and Time Discounting," Multinational Finance Journal, Multinational Finance Journal, vol. 17(3-4), pages 149-163, September.
    6. Lin, Mei-Chen, 2018. "The impact of aggregate uncertainty on herding in analysts' stock recommendations," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 90-105.
    7. He, Ying & Dyer, James S. & Butler, John C. & Jia, Jianmin, 2019. "An additive model of decision making under risk and ambiguity," Journal of Mathematical Economics, Elsevier, vol. 85(C), pages 78-92.
    8. Marc Oliver Rieger & Mei Wang & Thorsten Hens, 2015. "Risk Preferences Around the World," Management Science, INFORMS, vol. 61(3), pages 637-648, March.
    9. Minh Hai Ngo & Marc Oliver Rieger & Shuonan Yuan, 2018. "The Fundamental Equity Premium and Ambiguity Aversion in an International Context," Risks, MDPI, vol. 6(4), pages 1-24, November.
    10. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
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    More about this item

    Keywords

    Equity risk premium; Ambiguity aversion; Uncertainty avoidance; Cultural finance;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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