Solution to the Equity Premium Puzzle

Atilla Aras

Papers from arXiv.org

Abstract: This study provides a solution of the equity premium puzzle. Questioning the validity of the Arrow-Pratt measure of relative risk aversion for detecting the risk behavior of investors under all conditions, a new tool, that is, the sufficiency factor of the model was developed to analyze the risk behavior of investors. The calculations of this newly tested model show that the value of the coefficient of relative risk aversion is 1.033526 by assuming the value of the subjective time discount factor as 0.99. Since these values are compatible with the existing empirical studies, they confirm the validity of the newly derived model that provides a solution to the equity premium puzzle.

Date: 2020-11, Revised 2021-03
New Economics Papers: this item is included in nep-fmk and nep-upt
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Published in Research of Financial Economic and Social Studies 7 (2022) 612-631

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2011.05458

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