Another Look at the Equity Risk Premium Puzzle
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Günter Bamberg
Abstract
The model of Mehra and Prescott (1985, J. Econometrics, 22, 145-161) implies that reasonable coefficients of risk-aversion of economic agents cannot explain the equity risk premium generated by financial markets. This discrepancy is hitherto regarded as a major financial puzzle. We propose an alternative model to explain the equity premium. For normally distributed returns and for returns far away from normality (but still light tailed), realistic equity risk premia do not imply puzzlingly high risk aversions. Following our approach, the ‘equity premium puzzle’ does not exist. We also consider fat-tailed return distributions and show that Pareto tails are incompatible with constant relative risk aversion.
© 2019 by Walter de Gruyter Berlin/Boston
Articles in the same Issue
- Economic Factors of Victimization: Evidence from Germany
- Tax Competition, Investment Irreversibility and the Provision of Public Goods
- Itemised Deductions: A Device to Reduce Tax Evasion
- Risk-Off Episodes and Swiss Franc Appreciation: The Role of Capital Flows
- A Crook is a Crook . . . But is He Still a Crook Abroad? On the Effect of Immigration on Destination-Country Corruption
- Another Look at the Equity Risk Premium Puzzle
- Acknowledgements
- Index: Volume 16, 2015
Articles in the same Issue
- Economic Factors of Victimization: Evidence from Germany
- Tax Competition, Investment Irreversibility and the Provision of Public Goods
- Itemised Deductions: A Device to Reduce Tax Evasion
- Risk-Off Episodes and Swiss Franc Appreciation: The Role of Capital Flows
- A Crook is a Crook . . . But is He Still a Crook Abroad? On the Effect of Immigration on Destination-Country Corruption
- Another Look at the Equity Risk Premium Puzzle
- Acknowledgements
- Index: Volume 16, 2015
