Economics, Econometrics and Finance
8 years ago

Limited market participation boosts equity premium, impacting stock market dynamics.

European Finance Review
The Ambiguity Premium vs. the Risk Premium under Limited Market Participation*
Takashi Ui

Paper Summary

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Limited market participation can affect the equity premium in the stock market. When investors are unsure about the market, their uncertainty can lead to higher returns for stocks. This happens when the ambiguity premium outweighs the risk premium, causing the equity premium to increase. Factors like investors' uncertainty levels and stock return variance play a role in determining the impact of limited market participation on stock market returns.