IDEAS home Printed from https://ideas.repec.org/a/ucp/jpolec/doi10.1086-720396.html
   My bibliography  Save this article

Dissecting the Equity Premium

Author

Listed:
  • Tyler Beason
  • David Schreindorfer

Abstract

We use option prices and realized returns to decompose risk premia into different parts of the return state space. In the data, 8/10 of the average equity premium is attributable to monthly returns below −10%, but returns below −30% matter very little. In contrast, prominent asset pricing models based on habits, long-run risks, rare disasters, undiversifiable idiosyncratic risk, and constrained intermediaries attribute the premium predominantly to returns above −10% or to the extreme left tail. We show that the discrepancy arises from an unrealistically small price of risk for stock market tail events in the models.

Suggested Citation

  • Tyler Beason & David Schreindorfer, 2022. "Dissecting the Equity Premium," Journal of Political Economy, University of Chicago Press, vol. 130(8), pages 2203-2222.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/720396
    DOI: 10.1086/720396
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/720396
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: http://dx.doi.org/10.1086/720396
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: https://libkey.io/10.1086/720396?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Steven Heston & Kris Jacobs & Hyung Joo Kim, 2023. "The Pricing Kernel in Options," Finance and Economics Discussion Series 2023-053, Board of Governors of the Federal Reserve System (U.S.).
    2. Geert Bekaert & Eric Engstrom & Andrey Ermolov, 2023. "The Variance Risk Premium in Equilibrium Models," Review of Finance, European Finance Association, vol. 27(6), pages 1977-2014.
    3. Kroencke, Tim A., 2022. "Recessions and the stock market," Journal of Monetary Economics, Elsevier, vol. 131(C), pages 61-77.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jpolec:doi:10.1086/720396. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.journals.uchicago.edu/JPE .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.