The Total Risk Premium Puzzle?

Oscar Jorda, Moritz Schularick and Alan Taylor

No 2019-10, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: The risk premium puzzle is worse than you think. Using a new database for the U.S. and 15 other advanced economies from 1870 to the present that includes housing as well as equity returns (to capture the full risky capital portfolio of the representative agent), standard calculations using returns to total wealth and consumption show that: housing returns in the long run are comparable to those of equities, and yet housing returns have lower volatility and lower covariance with consumption growth than equities. The same applies to a weighted total-wealth portfolio, and over a range of horizons. As a result, the implied risk aversion parameters for housing wealth and total wealth are even larger than those for equities, often by a factor of 2 or more. We find that more exotic models cannot resolve these even bigger puzzles, and we see little role for limited participation, idiosyncratic housing risk, transaction costs, or liquidity premiums.

JEL-codes: E44 G12 G15 N20 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2019-03-20
New Economics Papers: this item is included in nep-his, nep-mac, nep-rmg and nep-upt
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: The Total Risk Premium Puzzle (2019)
Working Paper: The Total Risk Premium Puzzle (2019)
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DOI: 10.24148/wp2019-10

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