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Myopic Loss Aversion, Disappointment Aversion, and the Equity Premium Puzzle

38 Pages Posted: 4 Feb 2003  

Livio Stracca

European Central Bank (ECB)

David Fielding

University of Leicester - Department of Economics

Date Written: ECB Working Paper No. 203

Abstract

This paper takes a close look at the "behavioural finance" explanations of the equity premium puzzle, namely myopic loss aversion (Benartzi and Thaler, 1995) and disappointment aversion (Ang, Bekaert and Liu, 2000). The paper proposes a simple specification of loss and disappointment aversion and brings these theories to the data. The main conclusion of the paper is that a highly short-sighted investment horizon is required for the historical equity premium to be explained by loss aversion, while reasonable values for disappointment aversion are found also for long investment horizons. So, stocks may lose only in the short term, but may disappoint also in the long term.

Keywords: Myopic loss aversion, disappointment aversion, equity premium puzzle, investment horizon, reference dependence

JEL Classification: G11, G12

Suggested Citation

Stracca, Livio and Fielding , David, Myopic Loss Aversion, Disappointment Aversion, and the Equity Premium Puzzle (ECB Working Paper No. 203). Available at SSRN: https://ssrn.com/abstract=376191

Livio Stracca (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

David Fielding

University of Leicester - Department of Economics ( email )

New Building 304
Leicester LE1 7RH
United Kingdom
0116 252 3909 (Phone)

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