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The analysis of equity risk premium with the consideration of prospect theory: A case of Taiwan stock market

Soochow journal of economics and business, 2020-06 (100), p.61-94

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Title:
The analysis of equity risk premium with the consideration of prospect theory: A case of Taiwan stock market
Author: Lin, Yu-Hsiu
Subjects: Equity ; Risk premiums ; Securities markets ; Stocks
Is Part Of: Soochow journal of economics and business, 2020-06 (100), p.61-94
Description: The aim of this paper is to analyze the equity premium in Taiwan stock market. The consumption-based model with and without the consideration of prospect theory is utilized to estimate the equity premium. The estimated premia are then compared with the historical values. The empirical results reveal that in Taiwan stock market, the historical average values of equity premia are 13.8800%, 20.7272% and 7.3589% during the 1976-2016, 1976-1995 and 1996-2016 sample period, respectively. The corresponding premia estimated by the rational consumption-based model are 0.2792%, 0.5474% and 0.2331%. The rational model overestimates the riskfree rate and underestimates the expected return of stocks which results in a serious underestimation of equity premium. With the consideration of prospect theory, the augmented model generates higher estimated equity premium and can simu- ltaneously explain the phenomena of historical low riskfree rate and high equity premium. It is found that as the coefficient of relative risk aver
Publisher: Taipei: Soochow University
Language: Chinese
Identifier: ISSN: 0259-3769
Source: ProQuest Central

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