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Authors: Brian Kettell
Published by: Centre for Islamic Banking and Finance
Published in: 2001
Length: 14 pages
Data source: Generalised experience

Abstract

Financial markets have been characterised by tremendous growth in recent years. This growth has been shadowed by intensive academic research, particularly concerning the pricing of financial assets. In this note we discuss the extent to which standard valuation models can accurately explain the principal characteristics of recent financial market behaviour, both on the part of investors and on the part of the markets themselves. Many standard financial market models break down when applied to the actual behaviour of financial markets. The question marks raised, normally referred to as ''puzzles'', are the subject matter of this note. The puzzles discussed in the note are: (1) the equity risk premium puzzle; (2) the international diversification puzzle; and (3) the asset allocation puzzle.

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Abstract

Financial markets have been characterised by tremendous growth in recent years. This growth has been shadowed by intensive academic research, particularly concerning the pricing of financial assets. In this note we discuss the extent to which standard valuation models can accurately explain the principal characteristics of recent financial market behaviour, both on the part of investors and on the part of the markets themselves. Many standard financial market models break down when applied to the actual behaviour of financial markets. The question marks raised, normally referred to as ''puzzles'', are the subject matter of this note. The puzzles discussed in the note are: (1) the equity risk premium puzzle; (2) the international diversification puzzle; and (3) the asset allocation puzzle.

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