Analysis of Equity Premium Puzzle and Study of Pitfalls in Estimating the Coefficient of Relative Risk Aversion in Tehran Stock Exchange

Standard consumption-based models typically fail in pricing asset returns. In a famous seminal paper, Mehra and Prescott (1985), using a standard consumption model, prove the presence of equity premium puzzle. It has being tried to find an appropriate solution to the well known puzzle in financial economy literature. In contrast to this literature, which mainly focuses on the United States data, this study is simply intended to examine the existence of the puzzle based on Mehra framework (2003) in Tehran Stock Exchange and the period of 1992-2014. The estimations derived from Model confirm that the puzzle exist and it leads to the new and odd result of relative risk aversion coefficient in Tehran stock market. On the other side, we claim that the key consumption model assumptions, the choice of a proper riskless asset and the lack of data, generate obstacles in finding robustness in the estimations of the CRRA coefficients, in Tehran stock market.