The Equity Premium and the Risk Free Rate: A Cross Country, Cross Maturity Examination

Fabio Canova and Gianni de Nicolò

No 1119, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper examines the relationship between the equity premium and the risk free rate at three different maturities using post-1973 data for a panel of seven OECD countries. We show the existence of subsample instabilities, of some cross country differences and of inconsistencies with the expectations theory of the term structure. We perform simulations using a standard consumption based CAPM model and demonstrate that the basic features of Mehra and Prescott's (1985) puzzle remain, regardless of the time period, the investment maturity and the country considered. Modifications of the basic set-up are also considered.

Keywords: Calibration; Consumption Based CAPM; Equity Premium; Model Evaluation; Risk Free Rate; Term Structure (search for similar items in EconPapers)
JEL-codes: C15 E43 G12 (search for similar items in EconPapers)
Date: 1995-01
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Citations: View citations in EconPapers (5)

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Working Paper: The equity premium and the risk free rate: A cross country, cross maturity examination (1995)
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