THE EQUITY PREMIUM AND RISK-FREE RATE PUZZLES IN A TURBULENT ECONOMY: EVIDENCE FROM 105 YEARS OF DATA FROM SOUTH AFRICA

Shakill Hassan () and Andrew Van biljon

South African Journal of Economics, 2010, vol. 78, issue 1, pages 23-39

Abstract: This paper presents a detailed empirical examination of the South African equity premium, and a quantitative theoretic exercise to test the canonical inter-temporal consumption-based asset-pricing model under power utility. Over the long run, the South African stock market produced average returns six to eight percentage points above bonds and cash, and at the 20-year horizon, an investor would not have experienced a single negative realised equity premium over the entire 105-year period we examine. Yet the maximum equity premium rationalised by the consumption-based model is 0.4%. The canonical macro-financial model closely matches the average risk-free rate, using realistic parameters for the coefficient of risk aversion and a positive rate of time preference. Copyright (c) 2010 The Authors. Journal compilation (c) 2010 Economic Society of South Africa.

Date: 2010
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Working Paper: The Equity Premium and Risk-Free Rate Puzzles in a Turbulent Economy: Evidence from 105 Years of Data from South Africa (2009)
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