Can ambiguity aversion solve the equity premium puzzle? Survey evidence from international data

Ambiguity aversion has been suggested as a potential explanation for the equity premium puzzle in recent theoretical models. To test this hypothesis, we measure the amount of ambiguity aversion in a large-scale international survey. A comparison to the average equity premia in these countries demonstrates that ambiguity aversion does, indeed, have a significant influence on the amount of equity risk premium, even when controlling for macroeconomic parameters. Finally, we connect differences ambiguity aversion to differences in uncertainty avoidance, one of Hofstede's cultural dimensions. (C) 2012 Elsevier Inc. All rights reserved.