Likelihood Evidence on the Asset Returns Puzzle

Mike Tsionas

The Review of Economic Studies, 2005, vol. 72, issue 3, 917-946

Abstract: Standard equilibrium models are unable to replicate the average return on equity and the risk-free rate during 1889-1978, the well-known asset returns puzzle. The present paper, motivated by the excess of outliers in the data, proposes a normal-scale mixture stochastic process for output that is compatible with leptokurtosis. Using formal likelihood-based methods, it is shown that observed asset returns are compatible with posterior distributions implied by the model. Copyright 2005, Wiley-Blackwell.

Date: 2005
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