Document Type

Article

Publication Date

2011

Publication Title

Review of Behavioral Finance

Volume

3

Issue

1

Pages

27-53

Abstract

The equity premium of the S&P 500 index is explained in this paper by several variables that can be grouped into fundamental, behavioral, and macroeconomic factors. We hypothesize that the statistical significance of these variables changes across economic regimes. The three regimes we consider are the low‐volatility, medium‐volatility, and high‐volatility regimes in contrast to previous studies that do not differentiate across economic regimes. By using the three‐state Markov switching regime econometric methodology, we confirm that the statistical significance of the independent variables representing fundamentals, macroeconomic conditions, and a behavioral variable changes across economic regimes. Our findings offer an improved understanding of what moves the equity premium across economic regimes than what we can learn from single‐equation estimation. Our results also confirm the significance of momentum as a behavioral variable across all economic regimes.

Identifier

1940-5979

Comments

Author Posting. © Emerald Publishing Limited 2011. This is the authors' version of the work. It is posted here by permission of Emerald Publishing Limited for personal use, not for redistribution. The definitive version was published in the Review of Behavioral Finance, vol. 3, no. 1, 2011, http://www.emeraldinsight.com/doi/pdfplus/10.1108/19405979201100002

Creative Commons License

Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.

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