Can Rare Events Explain the Equity Premium Puzzle?

Anisha Ghosh and Christian Julliard ()

No 8899, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Probably not. First, allowing the probabilities of the states of the economy to differ from their sample frequencies, the Consumption-CAPM is still rejected in both U.S. and international data. Second, the recorded world disasters are too small to rationalize the puzzle unless one assumes that disasters occur every 6-10 years. Third, if the data were generated by the rare events distribution needed to rationalize the equity premium puzzle, the puzzle itself would be unlikely to arise. Fourth, the rare events hypothesis, by reducing the cross-sectional dispersion of consumption risk, worsens the ability of the Consumption-CAPM to explain the cross-section of returns.

Keywords: Calibration; Cross-Section of Asset Returns; Equity Premium Puzzle; Generalized Empirical Likelihood; Peso Phenomenon; Rare Disasters; Rare Events; Semi-parametric Bayesian Inference (search for similar items in EconPapers)
JEL-codes: C11 C14 E17 G12 (search for similar items in EconPapers)
Date: 2012-03
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Related works:
Working Paper: Can Rare Events Explain the Equity Premium Puzzle? (2008)
Working Paper: Can Rare Events Explain the Equity Premium Puzzle? (2008)
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