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Decoding the Equity Premium Puzzle: Insights and Updates from Behavioral Finance

Unravel the Equity Premium Puzzle through analyses by Jorion, Goetzmann, Mehra, and Prescott across 90 years of data, revealing unexpected yield patterns and survivor biases in global portfolios. Explore the updates and perspectives up to 2000, shedding light on the discrepancy in returns.

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Decoding the Equity Premium Puzzle: Insights and Updates from Behavioral Finance

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Presentation Transcript

  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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