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Disappointment aversion and the equity premium puzzle: new international evidence

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  • Yuxin Xie
  • Athanasios A. Pantelous
  • Chris Florackis

Abstract

Drawing upon the seminal study of Ang, Bekaert, and Liu [2005. “Why Stock May Disappoint?” Journal of Financial Economics 76 (3): 471–508], we incorporate disappointment aversion (DA, that is, aversion to outcomes that are worse than prior expectations) within a simple theoretical portfolio-choice model. Based on the results of this model, we then empirically address the portfolio allocation problem of an investor who chooses between a risky and a risk-free asset using international data from 19 countries. Our findings strongly support the view that DA leads investors to reduce their exposure to the stock market (i.e. DA significantly depresses the portfolio weights on equities in all cases considered). Overall, our study shows that in addition to risk aversion, DA plays an important role in explaining the equity premium puzzle around the world.

Suggested Citation

  • Yuxin Xie & Athanasios A. Pantelous & Chris Florackis, 2016. "Disappointment aversion and the equity premium puzzle: new international evidence," The European Journal of Finance, Taylor & Francis Journals, vol. 22(12), pages 1189-1203, September.
    • Handle: RePEc:taf:eurjfi:v:22:y:2016:i:12:p:1189-1203
    DOI: 10.1080/1351847X.2014.946529
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    Cited by:

    1. Kai-Yin Woo & Chulin Mai & Michael McAleer & Wing-Keung Wong, 2020. "Review on Efficiency and Anomalies in Stock Markets," Economies, MDPI, vol. 8(1), pages 1-51, March.
    2. Tai-Yuen Hon & Massoud Moslehpour & Kai-Yin Woo, 2021. "Review on Behavioral Finance with Empirical Evidence," Advances in Decision Sciences, Asia University, Taiwan, vol. 25(4), pages 15-41, December.

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