How does culture affect the size of the equity premium puzzle – an intercontinental comparison
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2020-08-03
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en
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This paper measures the size of the equity premium puzzle in six countries (both developed and emerging) spread over the six continents. To measure the size of the equity premium puzzle the average realized real annual return can be compared to the expected real equity premium based on the stock fundamentals as is done by Fama & French (2002). Subtracting the expected real equity premium based on the dividend growth model or the expected real equity premium based on the earnings growth model from the realized real return measures the size of the equity premium puzzle. Although, the results are insignificant there is an indication of the equity premium puzzle in emerging countries being higher than in developed countries. Thereafter, all the yearly values of all equity premium puzzles of the six countries are used in a pooled regression as done by Aggarwal & Goodell (2008) to test how culture affects the size of the equity premium puzzle. Culture is proven to be a significant determinant of the size of the equity premium puzzle. More uncertainty avoidant; long-term oriented; and individualistic countries have a larger equity premium puzzle.
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Faculteit der Managementwetenschappen