Work detail

Equity Premium Puzzle: Literature Review and the Czech Data

Author: Mgr. Miloš Hrachovec
Year: 2013 - winter
Leaders: doc. Ing. Tomáš Cahlík CSc.
Work type: Finance, Financial Markets and Banking
Language: English
Pages: 82
Awards and prizes:
Abstract: This thesis focuses on the equity premium puzzle, risk-free rate puzzle and possible
solutions of these two quantitative conundrums. Original formulation of both puzzles is
introduced and comprehensive literature survey is presented to show the developments
regarding this topic. These include risk-based explanations, non-risk based explanations
and behavioral finance perspective. Main contribution of this study dwells in estimation of
these two puzzles for the Czech Republic. Using consumption-based asset pricing model
with time separable preferences, presence of the two puzzles is estimated employing
annual Czech data from 1995 to 2011. The equity premium puzzle is not present in the
Czech Republic, as the coefficient of risk aversion  5.57 . On the other hand, the riskfree
rate puzzle is as severe as in developed economies. Furthermore, the individual time
preference parameter  is estimated to be larger than one – a counterintuitive result
suggesting consumers prefer unit of consumption tomorrow to unit of consumption today.
Robustness of the results is confirmed when different proxy for a risk-free rate is used.
Results do not change significantly and the risk-free rate puzzle persists. Direction for
future research of the financial market puzzles in the Czech Republic is suggested.
Downloadable: DT Hrachovec




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