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Risk, ambiguity, and equity premium: International evidence

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  • Kim, Eung-Bin
  • Byun, Suk-Joon

Abstract

We empirically examine the relation between risk, ambiguity, and market equity premium in 21 international stock markets. After estimating each country's degree of ambiguity from intraday data of iShares country ETFs (exchange-traded funds), we find a positive risk-return tradeoff. Investors' attitudes toward ambiguity is conditional on their expectations of probability of gains, but its relationship is nonlinear. This nonlinearity in ambiguity premium is more prominent in emerging markets. Additionally, we conduct a cross-country analysis, which shows that cross-country variations in cultural and institutional factors affect investors' behavior. Our international evidence supports that ambiguity alongside risk are the key determinants of investors' decision-making.

Suggested Citation

  • Kim, Eung-Bin & Byun, Suk-Joon, 2021. "Risk, ambiguity, and equity premium: International evidence," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 321-335.
    • Handle: RePEc:eee:reveco:v:76:y:2021:i:c:p:321-335
    DOI: 10.1016/j.iref.2021.06.002
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    More about this item

    Keywords

    Equity premium; Ambiguity; Risk-return tradeoff; International stock market;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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