Empirical Evidence for the New Definitions in Financial Markets and Equity Premium Puzzle

Paper: arXiv 2305.03468

Authors: Atilla Aras

Abstract

This study presents empirical evidence to support the validity of new definitions in financial markets. The author develops a new method to determine investors’ risk attitudes in financial markets. The risk attitudes of investors in US financial markets from 1889-1978 are analyzed and the results indicate that equity investors who invested in the composite S&P 500 index were risk-averse in 1977. Conversely, risk-free asset investors who invested in US Treasury bills were found to exhibit not enough risk-loving behavior, which can be considered a type of risk-averse behavior. These findings suggest that the new definitions in financial markets accurately reflect the behavior of investors and should be considered in investment strategies.

Complexity vs Empirical Score

• Math Complexity: 4.5/10
• Empirical Rigor: 4.0/10
• Quadrant: Philosophers — conceptual discussion, limited math and data

Why this score: The paper attempts to re-evaluate the classic Equity Premium Puzzle dataset (Mehra-Prescott 1889-1978) using non-standard definitions of risk attitudes. However, the methodology relies on unconventional conceptual frameworks with limited formal statistical validation and minimal clarity on full implementation details.

Research Flowchart

  flowchart TD
    A[Research Goal: Validate new financial market definitions & solve Equity Premium Puzzle] --> B[Data Inputs: US Market Data 1889-1978 S&P 500 & US Treasury Bills]
    B --> C[Methodology: Develop new model to determine investor risk attitudes]
    C --> D[Analyze Investor Behavior across Asset Classes]
    D --> E[Outcome 1: S&P 500 Equity Investors were Risk-Averse in 1977]
    D --> F[Outcome 2: T-Bill Investors exhibited insufficient Risk-Loving behavior]
    E & F --> G[Conclusion: New definitions accurately reflect market behavior]