Junior Can'T Borrow: A New Perspective On The Equity Premium PuzzleGeorge M. Constantinides (), John B. Donaldson and Rajnish Mehra () The Quarterly Journal of Economics, 2002, vol. 117, issue 1, pages 269-296 Abstract: Ongoing questions on the historical mean and standard deviation of the return on equities and bonds and on the equilibrium demand for these securities are addressed in the context of a stationary, overlapping-generations economy in which consumers are subject to a borrowing constraint. The key feature captured by the OLG economy is that the bulk of the future income of the young consumers is derived from their wages forthcoming in their middle age, while the bulk of the future income of the middle-aged consumers is derived from their savings in equity and bonds. The young would like to borrow and invest in equity but the borrowing constraint prevents them from doing so. The middle-aged choose to hold a diversified portfolio that includes positive holdings of bonds, and this explains the demand for bonds. Without the borrowing constraint, the young borrow and invest in equity, thereby decreasing the mean equity premium and increasing the rate of interest. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology Date: 2002 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: http://EconPapers.repec.org/RePEc:tpr:qjecon:v:117:y:2002:i:1:p:269-296 Ordering information: This journal article can be ordered from Access Statistics for this article The Quarterly Journal of Economics is edited by Robert J. Barro, Edward L. Glaeser and Lawrence F. Katz More articles in The Quarterly Journal of Economics from MIT Press |
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