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Disaggregation and the equity premium puzzle

Matthew Wilson

Journal of Empirical Finance, 2020, vol. 58, issue C, 1-18

Abstract: Standard macroeconomic models cannot explain why stocks so greatly outperform bonds. However, this result depends on the use of aggregate consumption data. If markets are incomplete, then a representative agent might not exist and it is necessary to use consumption data at the household rather than aggregate level. In the household data, I fail to reject the Euler equation when the coefficient of relative risk aversion is as low as 2.7–3.8. This result is robust in a very general framework and I prove that many of the tests used in the literature are biased.

Keywords: Equity premium puzzle; Stocks; Bonds; Interest rates; Consumer Expenditure Survey (search for similar items in EconPapers)
JEL-codes: E4 G1 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jempfin.2020.05.002

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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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