Another Look at the Equity Risk Premium Puzzle
Günter Bamberg and
German Economic Review, 2015, vol. 16, issue 4, 490-501
type="main" xml:id="geer12078-abs-0001"> The model of Mehra and Prescott (1985, J. Econometrics, 22, 145–161) implies that reasonable coefficients of risk-aversion of economic agents cannot explain the equity risk premium generated by financial markets. This discrepancy is hitherto regarded as a major financial puzzle. We propose an alternative model to explain the equity premium. For normally distributed returns and for returns far away from normality (but still light tailed), realistic equity risk premia do not imply puzzlingly high risk aversions. Following our approach, the ‘equity premium puzzle’ does not exist. We also consider fat-tailed return distributions and show that Pareto tails are incompatible with constant relative risk aversion.
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bla:germec:v:16:y:2015:i:4:p:490-501
Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1465-6485
Access Statistics for this article
German Economic Review is currently edited by Bernhard Felderer, Joseph F. Francois, Ivo Welch, Urs Schweizer and David E. Wildasin
More articles in German Economic Review from Verein für Socialpolitik Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().