Analyze the Equity Premium Puzzle from the Perspectives of the Momentum Effect and Reversal Effect

Against the backdrop that traditional asset pricing models fail to adequately explain the equity premium puzzle, this paper explores the reasons for the stock premium from the momentum effect and reversal effect in behavioral finance. Through the research of stock premium, this paper attempts to put forward suggestions for enhancing market efficiency and reducing irrational behaviors in the market. Based on the theoretical basis of momentum effect and reversal effect, this paper takes the Chinese stock market and the US stock market as the research objects, and focuses on analyzing the performances of the stock markets in the two countries. The research findings show that: in the short term, the Momentum Effect has a significant impact on stock premium. In the long term, the Reversal Effect has a significant impact on stock premium. This study also explores the influencing factors of the Momentum Effect and the Reversal Effect. Moreover, under the influence of the Momentum Effect and the Reversal Effect, the efficiency of the financial market will be reduced. The conclusions of this study can effectively demonstrate the role of irrational behaviors in the stock market, providing a practical basis for improving the efficiency of the financial market.