Equity Premium Puzzle in Habit Formation Model With Fuzzy Sensitive Functions: A Case Study of Iran

Subject Areas : Financial Knowledge of Securities Analysis

Alireza Erfani ¹ , Solmaz Safari ²

1 - Associate Professor of Economics, Semnan University of Semnan, Semnan, Iran
2 - Ph.D. student of economics, economics department of semnan university, Semnan, Iran

Received: 2016-09-10 Accepted : 2016-12-10 Published : 2018-03-21

Keywords: Bivariate GARCH, fuzzy, Equity Premium, Habit Model,

Abstract :

Economy condition and equity market could highly affect on risk aversion and equity premium. This paper therefore, intends to combine economy regimes and equity market in the framework of Sensitivity functions by using fuzzy variables in order to develop the Consumption Capital Asset Pricing in habit formation model. This model through the producing some extra resources for risk premium will be differently a help to resolve equity premium puzzle.The results, gathered from using the model in Iran data seasonally in the period 1371-1393, present that the trend in risk aversion and equity premium is counter-cyclically of economic. Indeed the period of recession will make an increase in risk aversion and equity premium consequently. This means that investors are intended to take risk only in lieu of high level of compensation and they also intend to allocate their funds into more certain fields such as bank deposits in this situation .While good news in the period of boom in economy will decrease risk aversion and equity premium consequently. Results also present that the increasing and decreasing regimes of market in combination with economic regimes have effect on the intensity of these phenomena

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