Investigating Risk Permium Puzzle Using Epstien and Zin recursive utility function in Iran's stock market (By Euler's functions and GMM method)

Document Type : Scientific paper

Authors

1 Departmant of Economics, University of Sistan and Baluchestan, Iran

2 Departmant of Economics, University of Sistan and Baluchestan

3 department of of Economics, Persian Gulf University Bushehr,

Abstract

Several models have been proposed to explain the relationship between risk and return on capital assets, among which the most important are the use of the CCAPM model. The inadequacy of the power utility function used in the model to explain the behavior of the observations, including the inability to solve the Risk Premium Puzzle, has led to an examination of the various methods and forms of other utility functions, among which the use of the proposed recursive utility functions By Epstein and Zin (1991).
In this article, after introducing and explaining the theoretical foundations of the Risk Premium Puzzle, we examine the ability of the model capital asset pricing based on consumption by using recursive utility with using Tehran Stock data for the years 1988- 2014 using the GMM method.
The results of the research show that, in addition to the empirical evidence, the estimated value of the relative risk aversion coefficient in the Euler equation related to the CCAPM model is at least equal to 22.07, which confirms the existence of the Risk Premium Puzzle. After adjusting the above model, using the recursive utility function and separating the relative risk-aversion coefficient and intertemporal substituation , the values obtained for these two parameters were 0.3 and 1.45, respectively. Considering the significant difference and also the significant decrease , the ability to adjustment the CCAPM model based on recursive utility function in solving the Risk Premium Puzzle for the stock market of Iran can be concluded.

Keywords

References

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Macroeconomics Research Letter
Volume 12, Issue 23
August 2017
Pages 133-154

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History

  • Receive Date: 01 January 1970
  • Accept Date: 01 January 1970

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