The Equity Premium: A Deeper Puzzle

Francisco Azeredo

University of California at Santa Barbara, Economics Working Paper Series from Department of Economics, UC Santa Barbara

Abstract: Traditional pre-1930 consumption measures understate the extent of serial correlation in the U.S. annual real growth rate of per capita consumption of non-durables and services due to measurement limitations in the construction of their major components. Under alternative measures proposed in this study, the serial correlation of consumption growth is found to be 0.32, contrary to the original estimate of -0.14. This new evidence implies that the class of dynamic general equilibrium models studied by Mehra and Prescott [12] generates negative equity premium for reasonable risk-aversion levels, thus further exacerbating the equity premium puzzle.

Keywords: persistence; consumption growth; equity premium puzzle; neoclassical growth model (search for similar items in EconPapers)
Date: 2007-09-01
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Citations: View citations in EconPapers (6)

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