User talk:Azeredo

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I've reverted the changes you made to Equity premium puzzle. If you want to make signficant changes to a Wikipedia article, it's a good idea to raise it on the discussion page first. More generally, it's not a good idea to delete the existing content and replace it with your own material. Try making smaller edits first, until you get a better idea how the whole process works JQ 06:13, 28 August 2006 (UTC)[reply]

New Article[edit]

I was the one that changed the current article in the Wikipedia for the “Equity Premium Puzzle”. The reason I did was because I thought the current version was very imprecise, incomplete, and in many statements plain wrong. I thought most people would benefit from a more complete and detailed version.

For example, in the first line of the current article it says:

“The equity premium puzzle refers to the phenomenon that observed average annual returns on stocks over the past century are higher, by approximately 6 percentage points, than returns on government bonds.”

This statement make very little sense. The fact that the historical equity premium is about 6% does not constitute a puzzle per se. The puzzle comes from the fact that standard neoclassical growth theory can not replicate such a large historical equity premium. This point is layout very clearly in the version I proposed and placed in wikipedia.

Furthermore, contrary to what is stated in the wikipedia article, the puzzle says nothing about the existence of arbitrage opportunities. In fact this is a very common misinterpretation of the puzzle. Arbitrages are investment opportunities with zero initial cost that lead to positive profit with no risk in the near future. The fact that the equity premium is so large could well be a reflection of risks that we economist do not know how to model and quantify yet.

Another incomplete and poor statement was:

“A large number of explanations for the puzzle have been proposed. These include a contention that the puzzle is a statistical illusion, modifications to the assumed preferences of investors and imperfections.”

Which studies state that the puzzle is a statistical illusion? What does the writer mean by imperfections?

Also emphasizing Benartzi and Thaler (1995) as the main solution to the puzzle is very bias and incorrect. There are several studies with insightful and interesting solutions for the puzzle, written in the last 20 years! I don’t think the wikipedia article should bias towards one solution over all others. In the version I proposed, a large number of solutions are pointed out.

I have read the original article of Mehra and Prescott and even replicated most of their results. Plus have also read Shiller’s articles. In fact, Shiller is known for a different puzzle called the volatility puzzle. It would be incorrect to attribute Shiller’s work to the equity premium puzzle.

I suggest we incorporate into the new article I proposed, some of the things you found interesting from the initial version. I think many students of economics and finance would benefit from a more complete, detailed, and correct version of the equity premium puzzle.

Hope you find this helpful. I will think about a new version, but please let me know your thoughts first.

Best Regards, Francisco