Does the Equity Premium Puzzle exist in Iran?

Investors decide on the type and amount of their investment by considering the two components of risk and return. In general, investing in risky and risk-free assets should be made according to their yield. The equity premium is obtained from the difference between the rate of return on risky and risk-free assets. In the theoretical literature, the failure of financial theory to explain the equity premium is known as the premium puzzle. In this context, the present study aims to empirically examine the equity premium puzzle in Iran for the quarterly period ۱۹۹۳‒۲۰۲۱. Using the C-CAPM model, we obtained the value of the negative risk aversion coefficient, and it was outside the accepted range, which indicates the existence of the puzzle of equity premium in Iran. Indeed, it is not possible to justify a negative risk aversion coefficient in an economy where agents are concerned about their consumption flow. Considering this issue and in order to resolve this puzzle, we incorporated exogenous consumption habits in the C-CAPM model. This measure resulted in a relatively positive risk aversion coefficient within an acceptable range. Thus, we could resolve the equity premium puzzle by applying habits to the C-CAPM model.

Keywords:

C-CAPM , Equity Premium Puzzle , Financial markets , Habit of Consumption , Risk aversion coefficient