Equity Premium Puzzle in Tehran Stock Exchange: stochastic dominance approach

Over the past 4 years(over Aug 2010 to Jan 2013), while the annual return on 5 years bank deposits was 25 percent; the total index of Tehran Stock Exchange on average grew by 155 percent. If the investors are return maximizer why they did not invest in the stock market extensively? This research addresses this question by testing for the existence of equity premium puzzle in Tehran Stock Exchange. Therefore, the Total Price Index of exchange market is considered as a risky asset and the return on long-term (5 years) deposit is a proxy for risk free asset. Data is monthly and covers Aug 2010 to Jan 2013; which is converted to real term using monthly inflation rate. To test for the equity premium puzzle, we apply a non-parametric, "Stochastic Dominance" method and the Kolmogorov-Smirnov and McFadden test statistics. The results rejects the existence of equity premium puzzle for Tehran Stock Exchange and concludes risk aversion as the primary cause of small outflow from deposits to the capital market. In addition, we have compared stochastic dominance of the Industry,50 Most Active Companies, and 30 Largest Companies indices of Tehran Stock Exchange pairwisely. The results suggest that market players, according to their preferences for portfolio optimization, rank the stocks indices as follow: First the Industry Index, then the Index of 50 Most Active Companies, and finally the Index of 30 Largest companies.