One trade at a time -- unraveling the Equity Premium Puzzle

Andrei N. Soklakov

Papers from arXiv.org

Abstract: Financial markets provide a natural quantitative lab for understanding some of the most advanced human behaviours. Among them is the use of mathematical tools known as financial instruments. Besides money, the two most fundamental financial instruments are bonds and equities. More than 30 years ago Mehra and Prescott found the numerical performance of equities relative to government bonds could not be explained by consumption-based (mainstream) economic theories. This empirical observation, known as the Equity Premium Puzzle, has been defying mainstream economics ever since. The recent financial crisis revealed an even deeper need for understanding financial products. We show how understanding the rational nature of product design resolves the Equity Premium Puzzle. In doing so we obtain an experimentally tested theory of product design.

Date: 2015-07, Revised 2020-08
New Economics Papers: this item is included in nep-fmk
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in published as Supplementary materials for "Economics of Disagreement", Entropy 22 (8), 860 (2020)

Downloads: (external link)
http://arxiv.org/pdf/1507.07214 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1507.07214

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().