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The Risk Premium for Equity: Explanations and Implications

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Author Info

  • Grant, S.
  • Quiggin, J.

    (Tilburg University, Center for Economic Research)

Abstract

The equity premium puzzle shows that using standard parameters and setup, the Consumption-based Capital Asset Pricing Model's (CCAPM's) prediction of the premium associated with systematic risk is out by an order of magnitude.The object of this paper is to consider the implications of each of the broad classes of explanations of the equity premium puzzle for resource allocation, welfare and policy.We argue that the most robust implications are those that flow directly from the high price of systematic risk and are therefore independent of the resolution of the puzzle.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2001-89.

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Date of creation: 2001
Date of revision:
Handle: RePEc:dgr:kubcen:200189

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Web page: http://center.uvt.nl

Related research

Keywords: risk premium; equity capital; resource allocation; welfare; capital asset pricing;

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References

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  1. Narayana R. Kocherlakota, 1995. "The equity premium: it's still a puzzle," Discussion Paper / Institute for Empirical Macroeconomics 102, Federal Reserve Bank of Minneapolis.
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Citations

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Cited by:
  1. Vance Martin & G.C. Lim & Esfandiar Maasoumi, 2004. "Discounting The Equity Premium Puzzle," Econometric Society 2004 Australasian Meetings 331, Econometric Society.
  2. Lim, G.C. & Maasoumi, Esfandiar & Martin, Vance L., 2006. "A reexamination of the equity-premium puzzle: A robust non-parametric approach," The North American Journal of Economics and Finance, Elsevier, vol. 17(2), pages 173-189, August.

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