The Equity Premium Puzzle: A Review

Rajnish Mehra

Foundations and Trends(R) in Finance, 2007, vol. 2, issue 1, 1-81

Abstract: Over two decades ago, Mehra and Prescott (1985) challenged the finance profession with a poser: the historical US equity premium is an order of magnitude greater than can be rationalized in the context of the standard neoclassical paradigm of financial economics. This regularity, dubbed "the equity premium puzzle," has spawned a plethora of research efforts to explain it away. In this review, the author takes a retrospective look at the original paper and explains the conclusion that the equity premium is not a premium for bearing non-diversifiable risk.

Keywords: Equity premium; Investment risk; Capital markets; Asset prices (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:now:fntfin:0500000006

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