Abstract

http://ssrn.com/abstract=918976
 
 

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The Loss Aversion / Narrow Framing Approach to the Equity Premium Puzzle


Nicholas Barberis


Yale School of Management; National Bureau of Economic Research (NBER)

Ming Huang


Cornell University - Samuel Curtis Johnson Graduate School of Management

July 2006

NBER Working Paper No. w12378

Abstract:     
We review a recent approach to understanding the equity premium puzzle. The key elements of this approach are loss aversion and narrow framing, two well-known features of decision-making under risk in experimental settings. In equilibrium, models that incorporate these ideas can generate a large equity premium and a low and stable risk-free rate, even when consumption growth is smooth and only weakly correlated with the stock market. Moreover, they can do so for parameter values that correspond to sensible attitudes to independent monetary gambles. We conclude by suggesting some possible directions for future research.

Number of Pages in PDF File: 37

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Date posted: July 26, 2006  

Suggested Citation

Barberis, Nicholas and Huang, Ming, The Loss Aversion / Narrow Framing Approach to the Equity Premium Puzzle (July 2006). NBER Working Paper No. w12378. Available at SSRN: http://ssrn.com/abstract=918976

Contact Information

Nicholas Barberis (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-436-0777 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Ming Huang
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
607-225-9594 (Phone)
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