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The Equity Premium and the Risk Free Rate: A Cross Country, Cross Maturity Examination

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  • Canova, Fabio
  • de Nicolo, Gianni

Abstract

This paper examines the relationship between the equity premium and the risk free rate at three different maturities using post-1973 data for a panel of seven OECD countries. We show the existence of subsample instabilities, of some cross country differences and of inconsistencies with the expectations theory of the term structure. We perform simulations using a standard consumption based CAPM model and demonstrate that the basic features of Mehra and Prescott's (1985) puzzle remain, regardless of the time period, the investment maturity and the country considered. Modifications of the basic set-up are also considered.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1119.

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Date of creation: Jan 1995
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Handle: RePEc:cpr:ceprdp:1119

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Related research

Keywords: Calibration; Consumption Based CAPM; Equity Premium; Model Evaluation; Risk Free Rate; Term Structure;

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Cited by:
  1. Cysne, Rubens Penha, 2005. "Equity-Premium Puzzle: Evidence From Brazilian Data," Economics Working Papers (Ensaios Economicos da EPGE) 586, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  2. Fabio Canova & Eva Ortega, 1996. "Testing calibrated general equilibrium models," Economics Working Papers 166, Department of Economics and Business, Universitat Pompeu Fabra.

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