Article1996

The Equity Premium: It's Still a Puzzle

944 citations0/0 files storedRePEc: Research Papers in Economics

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Financial Markets and Investment Strategies Stochastic processes and financial applications Economic theories and models

Abstract

The paper examines the literature that attempts to resolve the equity premium and riskfree rate puzzles. It demonstrates that the puzzles will confront any model of asset prices that relies on three crucial assumptions: preferences have a particular parametric form, asset markets are complete, and asset trade is frictionless. A survey of the literature that relaxes these assumptions reveals that there are now several plausible explanations of the seemingly low riskfree rate, but the large size of the equity premium remains a puzzle.

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2000Nonparametric risk management and implied risk aversion 1999Time series properties of an artificial stock market 2005Financial Markets and the Real Economy 2000Agent-based computational finance: Suggested readings and early research 2002Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle 2006Chapter 24 Agent-based Computational Finance 2002Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence 2012Ambiguity, Learning, and Asset Returns

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