Does the Equity Premium Puzzle exists in Iran?

Articles in Press

Document Type : Research Paper

Authors

1 Faculty of Management and Economics, Tarbiat Modares University, Tehran, Iran

2 Faculty of Management and Economics, Tarbiat Modares University, Tehran, Iran.

10.22059/ier.2023.365556.1007812

Abstract

Investors decide on the type and amount of their investment by considering the two components of risk and return. In general, investing in risky and risk-free assets should be made according to their yield. The equity premium is obtained from the difference between the rate of return on risky and risk-free assets. In the theoretical literature, the failure of financial theory to explain the equity premium is known as the premium puzzle. In this context, the aim of the present study is to empirically examine the equity premium puzzle in Iran for the quarterly period 1993‒2021. Using the C-CAPM model introduced by Mehra and Prescott, we obtained a negative risk aversion coefficient in this study. Since this coefficient is outside the acceptable range, it indicates the existence of the puzzle of equity premium in Iran. because, it is not possible to justify a negative risk aversion coefficient in an economy where agents are concerned about their consumption flow. Considering this issue and in order to resolve this puzzle, we incorporated exogenous consumption habits in the C-CAPM model. This measure resulted in a relatively positive risk aversion coefficient within an acceptable range. Thus, we could resolve the equity premium puzzle by applying habits to the C-CAPM model.

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Main Subjects

Iranian Economic Review

Articles in Press, Accepted Manuscript
Available Online from 04 December 2023

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