Exact Solutions for Expected Rates of Return Under Markov Regime Switching: Implications for the Equity Premium Puzzle

Andrew Abel

No 4110, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper derives simple closed-form solutions for expected rates of return on stocks and riskless one-period bills under the assumption that shocks to the growth rates of consumption and dividends are generated by a Markov regime-switching process. These closed-form solutions are used to show that the Markov regime-switching process exacerbates the equity premium puzzle and the risk-free rate puzzle. Three empirical examples illustrate the magnitude of the effects of Markov regime switching on equilibrium expected returns.

Date: 1992-06
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as Journal of Money, Credit and Banking, 26, 3, August 1994, Part I), pp. 345- 361

Downloads: (external link)
http://www.nber.org/papers/w4110.pdf (application/pdf)

Related works:
Journal Article: Exact Solutions for Expected Rates of Return under Markov Regime Switching: Implications for the Equity Premium Puzzle (1994)
Working Paper: Exact Solutions for Expected Rates of Return Under Markov Regime Switching: Implications for the Equity Premium Puzzle
Working Paper: Exact Solutions for Expected Rates of Return Under Markov Regime Switching: Implications for the Equity Premium Puzzle
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4110

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w4110

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by (wpc@nber.org).