Log-Normal Approximation of the Equity Premium in the Production Model

Burkhard Heer and Alfred Maussner ()

No 3311, CESifo Working Paper Series from CESifo

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 non-linear approximation of the Euler equations.

Keywords: equity premium; log-normal approximation; production CAPM (search for similar items in EconPapers)
JEL-codes: C63 E22 E32 G12 (search for similar items in EconPapers)
Date: 2010
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Journal Article: Log-normal approximation of the equity premium in the production model (2012)
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