Disappointment aversion and the equity premium puzzle: new international evidence

Yuxin Xie, Athanasios A. Pantelous, Chris Florackis

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3 Citations (Scopus)


Drawing upon the seminal study of Ang, Bekaert, and Liu [2005. “Why Stock May Disappoint?” Journal of Financial Economics 76 (3): 471–508], we incorporate disappointment aversion (DA, that is, aversion to outcomes that are worse than prior expectations) within a simple theoretical portfolio-choice model. Based on the results of this model, we then empirically address the portfolio allocation problem of an investor who chooses between a risky and a risk-free asset using international data from 19 countries. Our findings strongly support the view that DA leads investors to reduce their exposure to the stock market (i.e. DA significantly depresses the portfolio weights on equities in all cases considered). Overall, our study shows that in addition to risk aversion, DA plays an important role in explaining the equity premium puzzle around the world.

Original languageEnglish
Pages (from-to)1189-1203
Number of pages15
JournalEuropean Journal of Finance
Issue number12
Publication statusPublished - 25 Sep 2016
Externally publishedYes


  • disappointment aversion
  • downside risk
  • equity risk premium
  • portfolio choice
  • risk aversion

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