The equity premium puzzle: new evidence on the optimal holding period and optimal asset allocation

Purpose – The purpose of this paper is to report new original evidence on optimal holding periods and optimal asset allocations (Benartzi and Thaler, 1995). Design/methodology/approach – The authors employ a number of different value functions, a recent dataset, different markets, and varying investment horizons. Findings – The authors report original evidence across markets and over-time, employing different value functions and varying investment horizons. The results results indicate that, during the past decades, the optimal holding period (seven months during the whole period and four/five months during crises) is not affected by the value function employed, is in accordance with the Myopic Loss Aversion hypothesis, is consistent across markets, but is sensitive to economic crises and shorter to that reported in Benartzi and Thaler (12 months). The optimal asset allocation is also different to that of Benartzi and Thaler during crises periods and/or assuming value functions with probability distortion. Originality/value – The paper employs a number of different value functions, with and without probability distortion; it compares investor behavior in three important international markets (USA, UK, Germany); as a further robustness test the authors use various investment horizons.