Red tape asset pricing
Thiago de Oliveira Souza ()
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Thiago de Oliveira Souza: Department of Business and Economics, Postal: University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark, http://www.sdu.dk/staff/tsouza
No 8/2018, Discussion Papers of Business and Economics from University of Southern Denmark, Department of Business and Economics
The equity premium–risk-free rate puzzle in standard consumption-based asset pricing models disappears once we remove the government-imposed component from the consumption expenditure series. I calibrate this component based on the growth rates of two proxies for government intervention, which I also show to forecast the short- and long-term equity premiums between 1974 (or 1981) and 2017. In summary, investors require large premiums to hold stocks because stocks give poor returns when government intervention increases, thereby systematically reducing individuals’ utility levels.
Keywords: Equity premium puzzle; intervention; regulation; risk (search for similar items in EconPapers)
JEL-codes: E10 G10 H10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:sdueko:2018_008
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