Log-normal approximation of the equity premium in the production model

Burkhard Heer and Alfred Maussner ()

Applied Economics Letters, 2012, vol. 19, issue 5, 407-412

Abstract: The conditional equity premium in the model with production is often approximated by assuming a jointly log-normal distribution of the marginal rate of substitution in consumption and the marginal productivity of capital. We show that, for standard parameterization, this premium is about one-third less than that implied by a nonlinear approximation of the Euler equations.

Date: 2012
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Working Paper: Log-Normal Approximation of the Equity Premium in the Production Model (2010)
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DOI: 10.1080/13504851.2011.581201

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