The paper replicates the study of Benartzi and Thaler (1995), who sug- gest a behavioral explanation to the equity premium puzzle by myopic loss aversion. A technical extension to their methodology is suggested where con- ditional heteroskedasticity is incorporated when simulating returns, in place of the original temporal independence assumption. Swedish data is considered in addition to U.S. data. First, it is found that myopic loss aversion can explain the U.S. equity premium over bonds, although the obtained evaluation peri- ods are somewhat shorter than a year. For example, over the full U.S. sample period from 1926 to 2003, evaluation periods of seven and ten months are found using the original and the new approach to simulating returns, respec- tively. Second, myopic loss aversion suggestively explains the Swedish equity premium as well, which is new to the literature. Third, throughout the analy- sis of both data sets, longer evaluation periods are obtained under conditional heteroskedasticity. The last result indicates that myopic loss-averse and, in turn, cumulative prospect theory investors are sensitive to the distributional assumption made on returns.

This is a revised version of "Myopic Loss Aversion, the Equity Premium Puzzle, and GARCH", Working paper / Department of Economics, Uppsala University (Online), ISSN 1653-6975; 2005:11. (http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-79371)