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Economic Puzzles
In economics, a puzzle is a situation where the implication of theory is inconsistent with observed economic data. An example is the equity premium puzzle, which relates to the fact that over the last two hundred years, the risk premium of stocks over bonds has been around 5.5%, much larger than expected from theory. The equity premium puzzle was first documented by Mehra and Prescot (1985). List of puzzles *Consumption correlations puzzle *Equity premium puzzle *Equity home bias puzzle *Excess volatility puzzle * Feldstein-Horioka puzzle *Forward premium anomaly *Home bias in trade puzzle The home bias in trade puzzle is a widely discussed problem in macroeconomics and international finance, first documented by John T. McCallum in an article from 1995. McCallum showed that for the United States and Canada, inter-province trade is ... * Low volatility anomaly * Real exchange rate puzzles *Retirement-consumption puzzle *Missing trade puzzle, also known as Border puzzle Re ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Economics
Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interactions of Agent (economics), economic agents and how economy, economies work. Microeconomics analyses what is viewed as basic elements within economy, economies, including individual agents and market (economics), markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyses economies as systems where production, distribution, consumption, savings, and Expenditure, investment expenditure interact; and the factors of production affecting them, such as: Labour (human activity), labour, Capital (economics), capital, Land (economics), land, and Entrepreneurship, enterprise, inflation, economic growth, and public policies that impact gloss ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Equity Premium Puzzle
The equity premium puzzle refers to the inability of an important class of economic models to explain the average equity risk premium (ERP) provided by a diversified portfolio of equities over that of government bonds, which has been observed for more than 100 years. There is a significant disparity between returns produced by stocks compared to returns produced by government treasury bills. The equity premium puzzle addresses the difficulty in understanding and explaining this disparity. This disparity is calculated using the equity risk premium: The equity risk premium is equal to the difference between equity returns and returns from government bonds. It is equal to around 5% to 8% in the United States. The risk premium represents the compensation awarded to the equity holder for taking on a higher risk by investing in equities rather than government bonds. However, the 5% to 8% premium is considered to be an implausibly high difference and the equity premium puzzle refers to ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Risk Premium
A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. It is used widely in finance and economics, the general definition being the expected risky Rate of return, return less the Risk-free interest rate, risk-free return, as demonstrated by the formula below. Risk \ premium = E(r) - r_f Where E(r) is the risky expected rate of return and r_f is the risk-free return. The inputs for each of these variables and the ultimate interpretation of the risk premium value differs depending on the application as explained in the following sections. Regardless of the application, the market premium can be volatile as both comprising variables can be impacted independent of each other by both cyclical and abrupt changes. This means that the market premium is dynamic in nature and ever-changing. Additionally, a general observation regardless of application is that the risk premium is larger during economic do ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Stock
Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the shareholder (stockholder) to that fraction of the company's earnings, proceeds from liquidation of assets (after discharge of all Seniority (financial), senior claims such as secured and unsecured debt), or Voting interest, voting power, often dividing these up in proportion to the number of like shares each stockholder owns. Not all stock is necessarily equal, as certain classes of stock may be issued, for example, without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of Shareholder, shareholders. Stock can be bought and sold over-the-counter (finance), privately or on ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Bond (finance)
In finance, a bond is a type of Security (finance), security under which the issuer (debtor) owes the holder (creditor) a debt, and is obliged – depending on the terms – to provide cash flow to the creditor (e.g. repay the principal (i.e. amount borrowed) of the bond at the Maturity (finance), maturity date and interest (called the coupon (bond), coupon) over a specified amount of time.) The timing and the amount of cash flow provided varies, depending on the economic value that is emphasized upon, thus giving rise to different types of bonds. The interest is usually payable at fixed intervals: semiannual, annual, and less often at other periods. Thus, a bond is a form of loan or IOU. Bonds provide the borrower with external funds to finance long-term investments or, in the case of government bonds, to finance current expenditure. Bonds and Share capital, stocks are both Security (finance), securities, but the major difference between the two is that (capital) stockholders h ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Consumption Correlations Puzzle
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Consumption may refer to: * Eating *Resource consumption *Tuberculosis, an infectious disease, historically known as consumption * Consumer (food chain), receipt of energy by consuming other organisms * Consumption (economics), the purchasing of newly produced goods for current use also defined as the consuming of products ** Consumption function, an economic formula * Consumption (sociology) of resources, associated with social class, identity, group membership, and age See also * * Eating (other) * Consumerism Consumerism is a socio-cultural and economic phenomenon that is typical of industrialized societies. It is characterized by the continuous acquisition of goods and services in ever-increasing quantities. In contemporary consumer society, the ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Equity Premium Puzzle
The equity premium puzzle refers to the inability of an important class of economic models to explain the average equity risk premium (ERP) provided by a diversified portfolio of equities over that of government bonds, which has been observed for more than 100 years. There is a significant disparity between returns produced by stocks compared to returns produced by government treasury bills. The equity premium puzzle addresses the difficulty in understanding and explaining this disparity. This disparity is calculated using the equity risk premium: The equity risk premium is equal to the difference between equity returns and returns from government bonds. It is equal to around 5% to 8% in the United States. The risk premium represents the compensation awarded to the equity holder for taking on a higher risk by investing in equities rather than government bonds. However, the 5% to 8% premium is considered to be an implausibly high difference and the equity premium puzzle refers to ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Equity Home Bias Puzzle
In finance and investing, the Home bias puzzle is the term given to describe the fact that individuals and institutions in most countries hold only modest amounts of foreign equity, and tend to strongly favor company stock from their home nation. This finding is regarded as puzzling, since ample evidence shows equity portfolios obtain substantial benefits from diversification into global stocks. Maurice Obstfeld and Kenneth Rogoff identified this as one of the six major puzzles in international macroeconomics. Overview Home bias in equities is a behavioral finance phenomenon and it was first studied in an academic context by Kenneth French and James M. Poterba (1991) and Tesar and Werner (1995). Coval and Moskowitz (1999) showed that home bias is not limited to international portfolios, but that the preference for investing close to home also applies to portfolios of domestic stocks. Specifically, they showed that U.S. investment managers often exhibit a strong preference f ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Excess Volatility Puzzle
Robert James Shiller (born March 29, 1946) is an American economist, academic, and author. As of 2022, he served as a Sterling Professor of Economics at Yale University and is a fellow at the Yale School of Management's International Center for Finance. Shiller has been a research associate of the National Bureau of Economic Research (NBER) since 1980, was vice president of the American Economic Association in 2005, its president for 2016, and president of the Eastern Economic Association for 2006–2007. He is also the co‑founder and chief economist of the investment management firm MacroMarkets LLC. Shiller is known for four major intellectual contributions: 1) he co-developed the Case-Shiller housing price index, which uses a statistical technique to value a house based upon recent sales prices of other houses; 2) he challenged the Efficient Market Hypothesis (EFM), using a statistical model that showed that the U.S. stock market was more volatile than it should be if the ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Forward Premium Anomaly
The forward premium anomaly in currency markets (also referred to as the forward premium puzzle or the Fama puzzle) refers to the well documented empirical finding that the domestic currency appreciates when domestic nominal interest rates exceed foreign interest rates. This is perceived as puzzling in the context of the hypothesis that the expected future change in the exchange rate between two countries is equal to the interest-rate differential between these two countries; this hypothesis suggests that if all currencies are equally risky, investors would demand higher interest rates on currencies expected to ''fall'' in value. See . Thus, appreciation of the domestic currency when domestic interest rates are greater than foreign interest rates is called an anomaly. References See also *Economic puzzle * Real exchange-rate puzzles *Equity premium puzzle The equity premium puzzle refers to the inability of an important class of economic models to explain the average equity r ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Home Bias In Trade Puzzle
The home bias in trade puzzle is a widely discussed problem in macroeconomics and international finance, first documented by John T. McCallum in an article from 1995. McCallum showed that for the United States and Canada, inter-province trade is 20 times larger than international trade, holding other determinants of trade fixed. Subsequent estimates by John F. Helliwell and others have whittled this bias down to a factor from 6 to 12. This home bias in trade has later been documented among OECD countries. The preferred explanation for this finding has been the presence of formal and informal trade barriers following national borders. Another possible solution to the fact that domestic trade is 20 times larger than international trade could be that domestically traders speak the same language. If presence of formal and informal trade barriers following national borders was the sole reason for this puzzle, home bias should not exist on the subnational level. Wolf (2000) finds, howe ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
