Knut Wicksell Working Paper Series,
Lund University, Knut Wicksell Centre for Financial Studies

Abstract: This paper introduces a model to explain the equity-premium puzzle. Consumers exhibit both pessimism and doubt. Consumers are pessimistic if their beliefs about the dividend are a translation of the objective dividend by an independent and identically distributed normal random variable with negative mean. Consumers exhibit doubt if their beliefs are a translation of the objective dividend by an independent and identically distributed normal random variable with mean zero. A cross-sectional empirical study using the SHARE database explores the differences between various European countries in terms of pessimism and doubt and tests the theoretical model empirically.

Keywords: Behavioral Finance; Equity Premium; Doubt; Pessimism

JEL-codes: D81; G12; G14

28 pages, April 1, 2015

Note: Full text versions of the paper: http://www.lusem.lu.se/media/kwc/working-papers/2015/ny_wp_2015_5_emanuel_xiang_web.pdf

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