A Note on the McGrattan and Prescott (2003) Adjustments and the Equity Premium Puzzle

Selahattin Imrohoroglu

Macroeconomics from University Library of Munich, Germany

Abstract: McGrattan and Prescott (2003) argue that the average equity premium is less than one percent when the annual data used in the computation are adjusted in certain ways: equity returns reduced by subtracting diversification costs and taxes on dividend yields, and debt yields are raised by using long-term debt (instead of 90-day T-Bills) and ignoring the 1935-1960 period of government regulation of the financial sector. This note takes the adjusted measurements proposed by McGrattan and Prescott (2003) and subjects them to statistical tests in an attempt to examine the equity premium puzzle. The findings suggest that using their series solves the `average equity premium' puzzle but the `low risk-free rate' and `excess volatility' puzzles remain as challenges to standard theory.

JEL-codes: E (search for similar items in EconPapers)
Pages: 12 pages
Date: 2004-02-04
New Economics Papers: this item is included in nep-dge
Note: Type of Document - pdf; prepared on Win2000; pages: 12
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0402/0402009.pdf (application/pdf)

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: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0402009

Access Statistics for this paper

More papers in Macroeconomics from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).