Editing Equity premium puzzle (section)

=== Equity characteristics ===

Another explanation of the equity premium puzzle focuses on the characteristics of equity that cannot be captured by typical models but are still consistent with optimisation by investors.

The most significant characteristic that is not typically considered is the requirement for equity holders to monitor their activity and have a manager to assist them. Therefore, the principal-agent relationship is very prevalent between corporation managers and equity holders. If an investor was to choose to not have a manager, it is likely costly for them to monitor the activity of the corporations that they invest in and often rely heavily on auditors or they look to the market hypothesis in which information about asset values in the equity markets are exposed. This hypothesis is based on the theory that an investor who is inexperienced and uninformed can bank on the fact that they will get average market returns in an identifiable market portfolio, which is questionable as to whether or not this can be done by an uninformed investor. Although, as per the characteristics of equity in explaining the premium, it is only necessary to hypothesise that people looking to invest do not think they can reach the same level of performance of the market.<ref name="ageconsearch.umn.edu">{{cite journal |last1=Grant |first1=Simon |last2=Quiggin |first2=John |title=The Risk Premium for Equity: Implications for Resource Allocation, Welfare and Policy |journal=Australian Economic Papers |year=2006 |volume=45 |issue=3 |pages=253–268 |doi=10.1111/j.1467-8454.2006.00291.x|s2cid=15693644 |url=http://ageconsearch.umn.edu/record/151167 }}</ref>

Another explanation related to the characteristics of equity was explored by a variety of studies including Holmstrom and Tirole (1998),<ref name="Private and Public Supply of Liquid">{{cite journal |last1=Holmstrom |first1=Bengt |last2=Tirole |first2=Jean |title=Private and Public Supply of Liquidity |journal=Journal of Political Economy |date=February 1998 |volume=106 |issue=1 |pages=1–40 |doi=10.1086/250001|hdl=1721.1/64064 |s2cid=158080077 |hdl-access=free }}</ref> Bansal and Coleman (1996)<ref>{{cite journal |last1=Bansal |first1=Ravi |last2=Coleman |first2=Wilbur |title=A Monetary Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles |journal=Journal of Political Economy |date=December 1996 |volume=104 |issue=6 |pages=1135–1171 |doi=10.1086/262056|s2cid=54871134 }}</ref> and Palomino(1996)and was in relation to liquidity.<ref name="Noise Trading in Small Markets">{{cite journal |last1=Palomino |first1=Frederic |title=Noise Trading in Small Markets |journal=The Journal of Finance |date=September 1996 |volume=51 |issue=4 |pages=1537–1550 |doi=10.2307/2329404|jstor=2329404 |hdl=1814/498 |hdl-access=free }}</ref> Palomino described the noise trader model that was thin and had imperfect competition is the market for equities and the lower its equilibrium price dropped the higher the premium over risk-free bonds would rise.<ref name="Noise Trading in Small Markets"/> Holmstrom and Tirole in their studies developed another role for liquidity in the equity market that involved firms willing to pay a premium for bonds over private claims when they would be facing uncertainty over liquidity needs.<ref name="Private and Public Supply of Liquid"/>