Consumption Persistence and the Equity Premium Puzzle: A Resolution or Not? (Job Market Paper)

Jun Ma

Working Papers from University of Washington, Department of Economics

Abstract: As first pointed out by Mehra and Prescott (1985), the excess return of equities over the risk-free rate, roughly 6%, is too high to be readily reconciled with a standard intertemporal model. Recently, Bansal and Yaron (2000, 2004) have demonstrated a resolution of the equity premium puzzle when high persistence in the consumption growth process is combined with the Generalized Expected Utility (GEU) specification of Epstein and Zin (1989, 1991). However, Nelson and Startz (2006) and Ma, Nelson, and Startz (2006) have shown that standard estimates of persistence are generally spurious in time series models that are weakly identified. This motivates the re-examination of the evidence for resolution of the equity premium puzzle in this paper. Using the valid Anderson-Rubin type test proposed by Ma and Nelson (2006) I show that weak identification may account for the apparent resolution and valid confidence regions and tests reject high persistence in consumption growth. Also, the possibility of integrated expectations is examined using the Median Unbiased Estimator of Stock and Watson (1998) and little supporting evidence is found. Evidently, the equity premium puzzle remains just that.

Date: 2006-11, Revised 2006-11
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-upt
References: Add references at CitEc
Citations:

Downloads: (external link)
http://students.washington.edu/junma/Consumption_EPP.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

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:udb:wpaper:uwec-2006-21-r

Access Statistics for this paper

More papers in Working Papers from University of Washington, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Michael Goldblatt ().