Alternative Resolution to the Mehra-Prescott Puzzle: Verification by the Original Data

Hideaki Tamura () and Yoichi Matsubayashi
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Yoichi Matsubayashi: Graduate School of Economics, Kobe University

No 1634, Discussion Papers from Graduate School of Economics, Kobe University

Abstract: Many extensive debates followed Mehra and Prescott fs (1985) sensational empirical results concerning the equity premium embodied in household equity portfolios. The problem of the equity premium?the Mehra?Prescott puzzle?arises because researchers overlook the factor of uncertainty in household consumption behaviour, thereby failing to account for the offsetting effect in the intertemporal substitution of consumption. Although many US empirical studies reject the consumption-based capital asset pricing model under a time-separable constant relative risk aversiontype utility function, we resolve this problem by formulating an expandedEuler equation that accommodates uncertainty using Mehra?Prescott fs original data.

Keywords: Intertemporal consumption; Precautionary saving; Uncertainty; Offsetting effect; Euler equation; Equity premium puzzle (search for similar items in EconPapers)
JEL-codes: C51 D81 D91 E21 G12 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2016-10
New Economics Papers: this item is included in nep-mac and nep-upt
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