Risk Premia and Term Premia in General Equilibrium

No 6683, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The equity premium consists of a term premium reflecting the longer maturity of equity relative to short-term bills, and a risk premium reflecting the stochastic nature of equity payoffs and the deterministic nature of payoffs on reckless bills. This paper analyzes term premia and the risk premia in a general equilibrium model with catching up with the Joneses preferences and a novel formulation of leverage. Closed-form solutions for moments of asset returns are derived. First-order approximations illustrate the effects of parameters and provide an algorithm to match the means and variances of the riskless rate and the rate of return on equity.

JEL-codes: G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: Written 1998-08
Note: AP
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Published as Journal of Monetary Economics, Vol. 43, no. 1 (February 1999): 3-33.

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Journal Article: Risk premia and term premia in general equilibrium (1999)
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