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Behavioral Finance

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.

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Behavioral Finance

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  1. Behavioral Finance Economics 437

  2. Equity Premium Puzzle • What is it? • What explains it? • Jorion and Goetzmann

  3. 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

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

  5. 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%

  6. The End

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