Abstract/Details

Essays on the equity premium puzzle, earnings volatility, and expected stock returns


2005 2005

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Abstract (summary)

There are two essays in the dissertation. In the first essay, I reexamine the level and volatility of the equity premium in an overlapping generations environment with time-varying risk aversion. When calibrated with reasonable historical government bond and equity market data, my model has the potential to match not only the observed equity premium level, but also its volatility when the population in the economy has an average risk aversion coefficient of about eight. A reasonably large equity premium can be reproduced with two regimes that have risk aversion coefficients that are low and not too disparate. My numerical results demonstrate that the equity premium and its volatility are increasing in the degree of risk aversion and investor heterogeneity, and decreasing in the savings motive arising from positive income shocks. I also demonstrate that different sets of “reasonable” calibration inputs can lead to equity premia and returns that are off by an order of magnitude. To solve the equity premium, riskfree rate and volatility puzzles simultaneously, one needs a larger dispersion in risky asset earnings than what is empirically observed.

In the second essay, I investigate the empirical relationship between earnings volatility and cross-sectional stock returns. I find strong and consistent evidence that realized earnings volatility is negatively related to expected returns at the portfolio level. This relationship is independent of the size effect, the value effect, the market beta and own return volatility, and is robust to a wide range of earnings volatility measures. However, at the firm level, earnings volatility does not exhibit return-related information.

Indexing (details)


Subject
Finance;
Business community;
Essays;
Studies;
Risk aversion;
Return on investment;
Earnings;
Volatility
Classification
0508: Finance
0310: Business community
Identifier / keyword
Social sciences; Earnings volatility; Equity premium puzzle; Stock returns
Title
Essays on the equity premium puzzle, earnings volatility, and expected stock returns
Author
Huang, (Alan) Guoming
Number of pages
116
Publication year
2005
Degree date
2005
School code
0051
Source
DAI-A 66/08, Dissertation Abstracts International
Place of publication
Ann Arbor
Country of publication
United States
ISBN
9780542280269, 0542280264
Advisor
Hughson, Eric N.; Leach, J. Chris
University/institution
University of Colorado at Boulder
University location
United States -- Colorado
Degree
Ph.D.
Source type
Dissertations & Theses
Language
English
Document type
Dissertation/Thesis
Dissertation/thesis number
3186936
ProQuest document ID
305009977
Copyright
Database copyright ProQuest LLC; ProQuest does not claim copyright in the individual underlying works.
Document URL
http://search.proquest.com/docview/305009977
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