This paper deals with the difference of potential returns of diverse assets within a long-term period. Recent articles investigated an unexplainable abnormality of long term returns of stocks in comparison to risk-free securities even if stocks were risk- adjusted. This phenomenon is called the Equity Premium Puzzle.
With this paper we want to investigate how current investors make use of the disclosures of these papers. Since one assumption of capital markets is that any information is available to any investor in the world, any investor who invests on a long term basis would act irrational if she invests within the bond market, while she could earn a lot more money in the stock market. Furthermore this fact of the existence of not rational acting investors might show that capital markets are not that efficient as expected or information among investors are not shared sufficiently through markets as an earlier study showed.
In our study we created a questionnaire of about 22 questions. All questions which were applied were held superficially, so that the respondent had no clue which goal we were looking for with that survey. We distributed our questionnaire to all available investors of all different ages. However we tried to focus on those investors with a long time investment horizon, such as students, pupils or early workers in the end 20’s or less. Since the Equity Premium Puzzle is not only a national issue, we did our survey not only in the United States of America but also in Germany.
Table of Contents
1. Abstract
2. The Paper
Objectives and Research Themes
The primary objective of this paper is to investigate how current investors, specifically finance professors, utilize findings related to the "Equity Premium Puzzle" in their personal investment decision-making. The study explores whether professional knowledge of historical stock market outperformance relative to risk-free assets influences individual investment behaviors, asset allocation strategies, and risk perception.
- Analysis of the historical "Equity Premium Puzzle" and its theoretical underpinnings.
- Evaluation of investment strategies and asset allocation among finance faculty.
- Examination of the relationship between professional experience and awareness of market anomalies.
- Investigation of investor behavior during bullish and bearish market cycles.
- Validation of existing financial theories through empirical survey data.
Excerpt from the Book
The Paper
This article presents the results of a survey of 116 finance professors regarding their assumptions and opinions of the equity premium puzzle. The survey was activated online on March, 1st and was available until March 15th 2007. During that period a slight crash occurred in the U.S. stock markets. However, all indices were able to recoup at least partially, as can be seen today.
Additionally, some earlier research by Fama and French in 2001, Shiller in 2000 and Welch in 2001 may have affected investor’s opinions about the equity premium. Welch investigated that the consensus of “finance professional’s” outlook concerning the equity premium was higher than the premium actually was. Thus, with a market downfall that may have resulted in finance professors being more pessimistic, we investigated further the comments made by Welch. In addition, we posed questions that may have further implications regarding other theories. The true value of the equity risk premium is often at the center of constant discussion among academics and researchers. The value of the equity risk premium is the degree to which risky assets, or stocks, are expected to outperform relatively risk-free assets, such as bonds. Generally, there has been very little consensus concerning the value of the equity risk premium because of the role that varying, unobservable agent expectations play in shaping market portfolio and risk-free returns. The true value of the equity risk premium contends as “one of the most important but elusive quantities in finance” (Pastor & Stambaugh 2001). This can be duly noted as several plausible theories that attempt to explain the quantity are explored.
Summary of Chapters
Abstract: This chapter introduces the "Equity Premium Puzzle," documenting the historical outperformance of stocks over bonds and outlining the paper's intent to survey investors regarding their utilization of this knowledge.
The Paper: This section details the methodology of the survey conducted among 116 finance professors, presents the empirical findings regarding asset allocation and investment horizons, and discusses the correlation between professional experience and awareness of the equity premium.
Keywords
Equity Premium Puzzle, Finance Faculty, Asset Allocation, Risk-Free Assets, Market Efficiency, Investment Horizon, Portfolio Rebalancing, Stock Market, Risk Aversion, Financial Decision-Making, Investor Behavior, Bullish Markets, Transaction Costs, Behavioral Finance.
Frequently Asked Questions
What is the central focus of this research?
The research focuses on the "Equity Premium Puzzle," which is the empirical observation that stocks have significantly outperformed bonds over the last century, and whether finance professionals incorporate this knowledge into their own investment strategies.
What are the key thematic areas addressed in this study?
The key themes include the historical performance of stocks versus risk-free assets, the impact of professional expertise on investment behavior, asset allocation patterns among finance faculty, and the prevalence of long-term investment strategies.
What is the primary goal or research question?
The primary goal is to determine if collegiate finance professors, who are expected to be experts on the subject, act upon the findings of the equity premium puzzle in their personal financial planning, or if market inefficiencies persist despite their awareness.
Which scientific method is utilized in this paper?
The authors conducted an online, anonymous survey of 116 finance professors in North America, utilizing statistical analysis and partial regressions to examine correlations between demographics, investment experience, and portfolio management decisions.
What topics are covered in the main body of the paper?
The main body covers historical theories explaining the equity premium (such as loss aversion and habit formation), details the survey design and implementation, and presents analyzed data on asset allocation, portfolio turnover, and investment horizons.
How would you characterize this paper with keywords?
The paper is characterized by terms such as Equity Premium Puzzle, Asset Allocation, Investor Behavior, Risk Aversion, and Financial Decision-Making.
Did the survey participants show a high level of risk aversion?
Based on the survey results, the respondents demonstrated what appears to be low risk aversion, as evidenced by their high average allocation to stocks and their generally optimistic outlook during the bullish market period when the survey was conducted.
What relationship did the authors find between investment experience and puzzle awareness?
Interestingly, the authors found a negative correlation: the higher an investor's experience, the less likely they were to be aware of the equity premium puzzle, which suggests that professional experience does not necessarily translate into awareness of this specific academic debate.
How does the paper explain the long-term orientation of the participants?
The study found that a majority of the finance professors surveyed hold long-term to very long-term investment horizons, with low portfolio turnover, suggesting that they employ a "buy and hold" strategy rather than active daily trading.
- Citation du texte
- Thomas Kochanek (Auteur), Jeremy Alexander (Auteur), 2007, A New Look at the Equity Premium. A Survey of Collegiate Financial Faculty, Munich, GRIN Verlag, https://www.grin.com/document/118324
