Economics at your fingertips  

A model of mean reversion in stock prices and the Equity Premium Puzzle

Yuuki Maruyama

No 6gwjq, OSF Preprints from Center for Open Science

Abstract: In this model, the stock price is determined by two variables: the fundamental value and the current risk preference of people. Suppose that the fundamental value follows Geometric Brownian motion and the function of the risk preference of people follows Ornstein-Uhlenbeck process. There are only two types of asset: money (safe asset) and stocks (risk asset). In this case, the profit rate of equity investment is mean reverting, and long-term investment is more advantageous than short-term investment. The market is arbitrage-free. Also, based on this model, I suggest a solution to the Equity Premium Puzzle.

Date: 2019-10-07
New Economics Papers: this item is included in nep-cmp and nep-upt
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)

Related works:
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:

DOI: 10.31219/

Access Statistics for this paper

More papers in OSF Preprints from Center for Open Science
Bibliographic data for series maintained by OSF ().

Page updated 2020-01-27
Handle: RePEc:osf:osfxxx:6gwjq