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 interac ...

, a puzzle is a situation where the implication of theory is inconsistent with observed economic data. An example is the

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 ...

, which relates to the fact that over the last two hundred years, the

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 retur ...

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 corporatio ...

s 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 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 n ...

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 ...

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. T ...

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 fo ...

* Feldstein-Horioka puzzle *

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 ...

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

References

{{Economic-term-stub