Behavioral Finance Economics 437.

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Behavioral Finance Economics 437.
Presentation transcript:

Behavioral Finance Economics 437

Equity Premium Puzzle What is it? What explains it? Jorion and Goetzmann

Mehra and Prescott 1985 90 years of data Average “real” annual yield of S&P500 = 7% Yield for short term debt < 1% Not consistent with presumed level of risk aversion

Update in 2003 by Mehra Updates info up to 2000 Looks at UK, Japan, Germany France Similar Results

Jorion & Goetzmann (2007) Equity Premium Puzzle caused by “survivor bias” What happens to a “global” portfolio US equities from 1921 to 1996 had a “real” return of 4.3 % Median return of all other countries was 0.8%

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