The Loss Aversion / Narrow Framing Approach to the Equity Premium Puzzle / Nicholas Barberis, Ming Huang.
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Item type | Home library | Collection | Call number | Status | Date due | Barcode | Item holds | |
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Working Paper | Biblioteca Digital | Colección NBER | nber w12378 (Browse shelf(Opens below)) | Not For Loan |
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July 2006.
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.
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