Equity Premia with Benchmark Levels of Consumption: Closed-Form Results
Andrew Abel
No 12290, NBER Working Papers from National Bureau of Economic Research, Inc
Abstract:
I calculate exact expressions for risk premia, term premia, and the premium on levered equity in a framework that includes habit formation, keeping/catching up with the Joneses, and possible departures from rational expectations. Closed-form expressions for the first and second moments of returns and for the R2 of a regression of stock returns on the dividend-price ratio are derived under lognormality for the case that includes keeping/catching up with the Joneses. Linear approximations illustrate how these moments of returns are affected by parameter values and illustrate quantitatively how well the model can account for values of the equity premium, the term premium, and the standard deviations of the riskless return and the rate of return on levered equity. For empirically relevant parameter values, the linear approximations yield values of the various moments that are close to those obtained from the exact solutions.
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2006-06
New Economics Papers: this item is included in nep-bec, nep-fin and nep-fmk
Note: AP EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)
Published as Mehra, Rajnish (ed.) Handbook of the Equity Risk Premium, Handbooks in Finance. Amsterdam and Boston: Elsevier, North-Holland, 2008.
Downloads: (external link)
http://www.nber.org/papers/w12290.pdf (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:12290
Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w12290
Access Statistics for this paper
More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().