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Disaggregation and the equity premium puzzle

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  • Wilson, Matthew S.

Abstract

Standard macroeconomic models cannot explain why stocks so greatly outperform bonds. However, this result depends on the use of aggregate consumption data. If markets are incomplete, then a representative agent might not exist and it is necessary to use consumption data at the household rather than aggregate level. In the household data, I fail to reject the Euler equation when the coefficient of relative risk aversion is as low as 2.7–3.8. This result is robust in a very general framework and I prove that many of the tests used in the literature are biased.

Suggested Citation

  • Wilson, Matthew S., 2020. "Disaggregation and the equity premium puzzle," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 1-18.
    • Handle: RePEc:eee:empfin:v:58:y:2020:i:c:p:1-18
    DOI: 10.1016/j.jempfin.2020.05.002
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    References listed on IDEAS

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    Cited by:

    1. Fujii, Yoichiro & Nakamura, Yutaka, 2021. "Regret-sensitive equity premium," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 302-307.

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    More about this item

    Keywords

    Equity premium puzzle; Stocks; Bonds; Interest rates; Consumer Expenditure Survey;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G1 - Financial Economics - - General Financial Markets

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