EconPapers    
Economics at your fingertips  
 

The Equity Premium is No Puzzle

Mordecai Kurz and Andrea Beltratti

Working Papers from Stanford University, Department of Economics

Abstract: February 12, 1996 (First draft: May 17, 1995) We examine the equity premium puzzle with the perspective of the theory of Rational Beliefs Equilibrium (RBE) and show that from the perspective of this theory there is no puzzle. In an RBE agents need to be compensated for the endogenously propagated price uncertainty which is not permitted under rational expectations. It is then argued that endogenous uncertainty is the predominant uncertainty of asset returns and its presence provides a natural explanation of the observed premium. Utilizing data on the asset allocation of 63 U.S. mutual funds, we test some empirical implications of the theory of rational beliefs as well as estimate the parameters of risk aversion of mutual fund managers. Our tests show that the predictions of the theory are consistent with the empirical evidence. We then construct a simple two agent model of the U.S. economy in which the agents hold rational beliefs and calibrate it to the empirical experience in accord with the parameters of the Mehra and Prescott (1985) paper. The results of our calculations show that the model predictions fit closely the historical record.

References: Add references at CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

Downloads: (external link)
http://www-econ.stanford.edu/faculty/workp/swp96004.zip
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www-econ.stanford.edu/faculty/workp/swp96004.zip [302 Found]--> http://web.stanford.edu/dept/economics/faculty/workp/swp96004.zip)

Related works:
Working Paper: The Equity Premium Is No Puzzle (1996)
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:wop:stanec:96004

Access Statistics for this paper

More papers in Working Papers from Stanford University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Krichel ().

 
Page updated 2020-09-26
Handle: RePEc:wop:stanec:96004