The Effect of Economic and Financial Regime-switching on Equity Premium Puzzle In Fuzzy Logic Framework: The Evidence from Iran

Subject Areas : Journal of Investment Knowledge

Alireza Erfani ¹ , Esmaiel Abounoori ² , Solmaz Safari ³

1 - Assistance Professor of Economics, Department of Economics, Semnan University,
2 - Professor of Econometrics and Social Statistics,Department of Economics, Semnann University, Semnan-Iran.
3 - PhD Student in Economics, Department of Economics, Semnan University, semna-Iran. (corresponding author)

Received: 2017-04-26 Accepted : 2017-07-27 Published : 2017-10-23

Keywords: Fuzzy Bivariate GARCH, C-CAPM, Regime-switching,

Abstract :

     This paper evaluates simultaneously the effect of  alterations in economic regime together with financial regime on equity premium puzzle seasonally in the period 1371-1393. A combinational model including Bivariate GARCH and Fuzzy dummy variable with Consumption Capital Asset Pricing model (CCAPM-F) is used in order to achieve to this goal. Results present the risk aversion coefficient is maximum when there is the recession in both market stock and economy, which means the 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. Finally, regime of economic recession is generally associated with higher levels of risk aversion.

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