UTILITY FUNCTIONS AND EQUITY PREMIUM PUZZLE: EVIDENCE FROM THE V-4 ECONOMIES
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The paper introduces the concept of equity premium puzzle within a stochastic discount factor model and then it presents Hansen-Jagannathan bounds as a means of both capturing this phenomena and also testing various utility function specifications, which might help to explain and solve the puzzle. Three utility frameworks are assumed in the paper: constant relative risk aversion, habit formation and Epstein-Zin utility. Data on equity premiums are analysed for the Czech Republic, Hungary, Poland and Slovakia. The comparison of Hansen-Jagannathan bounds with the restrictions given by the three utility functions shows that it is not possible to expect to employ a universal approach to this issue as the conclusions differ to some extent across the economies examined. Generally the alternative utility frameworks do not seem to be a solution to the equity premium puzzle in case of V-4 economies.
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