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What Does the Equity Premium Mean?

Author

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  • Grant Simon

    (Rice University)

  • Quiggin John

    (University of Queensland)

Abstract

Simon Grant and John Quiggin argue that taking the equity premium seriously--the well-known fact that the average annual historical return of stocks is seven times that of government bonds and other debt--has many implications, the most robust of which is that recessions are extremely costly even if they don't lower average consumption and that macroeconomic stabilization policies are more important than has been thought.

Suggested Citation

  • Grant Simon & Quiggin John, 2005. "What Does the Equity Premium Mean?," The Economists' Voice, De Gruyter, vol. 2(4), pages 1-7, September.
    • Handle: RePEc:bpj:evoice:v:2:y:2005:i:4:n:2
    DOI: 10.2202/1553-3832.1088
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    References listed on IDEAS

    as
    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Weil, Philippe, 1992. "Equilibrium asset prices with undiversifiable labor income risk," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 769-790.
    3. Simon Grant & John Quiggin, 2003. "Public Investment and the Risk Premium for Equity," Economica, London School of Economics and Political Science, vol. 70(277), pages 1-18, February.
    4. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    5. Andrew Atkeson & Christopher Phelan, 1994. "Reconsidering the Costs of Business Cycles with Incomplete Markets," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 187-218, National Bureau of Economic Research, Inc.
    6. Mankiw, N. Gregory, 1986. "The equity premium and the concentration of aggregate shocks," Journal of Financial Economics, Elsevier, vol. 17(1), pages 211-219, September.
    7. Kenneth J. Arrow & Robert C. Lind, 1974. "Uncertainty and the Evaluation of Public Investment Decisions," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 3, pages 54-75, Palgrave Macmillan.
    8. Simon Grant & John Quiggin, 2002. "The Risk Premium for Equity: Implications for the Proposed Diversification of the Social Security Fund," American Economic Review, American Economic Association, vol. 92(4), pages 1104-1115, September.
    9. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers t2, Columbia - Center for Futures Markets.
    10. Mehra, Rajnish & Prescott, Edward C., 2003. "The equity premium in retrospect," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 14, pages 889-938, Elsevier.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. John Quiggin, 2009. "Six Refuted Doctrines," Economic Papers, The Economic Society of Australia, vol. 28(3), pages 239-248, September.
    2. Zimper, Alexander, 2012. "Asset pricing in a Lucas fruit-tree economy with the best and worst in mind," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 610-628.
    3. Quiggin, John, 2007. "Stern and his critics on discounting and climate change," Risk and Sustainable Management Group Working Papers 152087, University of Queensland, School of Economics.

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