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Discounting The Equity Premium Puzzle

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  • Vance Martin
  • G.C. Lim
  • Esfandiar Maasoumi

Abstract

This paper applies recent tests of stochastic dominance of several orders proposed by Linton, Maasoumi and Whang (2003) to reexamine the equity premium puzzle. An advantage of this nonparametric framework is that it provides a means to assess whether the existence of a premium is due to an incorrect choice of either the utility function or the underlying returns distribution. The approach is applied to a range of data sets including the S&P500

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File URL: http://repec.org/esAUSM04/up.2531.1078895389.pdf
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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 331.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:ausm04:331

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Keywords: Equity premium puzzle; stochastic dominance; nonparametric; subsampling.;

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References

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  1. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
  2. Campbell, John & Cochrane, John, 2000. "Explaining the Poor Performance of Consumption-Based Asset Pricing Models," Scholarly Articles 3163265, Harvard University Department of Economics.
  3. Mehra, Rajnish & Prescott, Edward C., 1988. "The equity risk premium: A solution?," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 133-136, July.
  4. Rajnish Mehra & Edward C. Prescott, 2003. "The Equity Premium in Retrospect," NBER Working Papers 9525, National Bureau of Economic Research, Inc.
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  9. John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
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  14. Linton, Oliver & Maasoumi, Esfandiar & Whang, Yoon-Jae, 2003. "Consistent Testing for Stochastic Dominance under General Sampling Schemes," SFB 373 Discussion Papers 2003,31, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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  22. Grant, S. & Quiggin, J., 2001. "The Risk Premium for Equity: Explanations and Implications," Discussion Paper 2001-89, Tilburg University, Center for Economic Research.
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Cited by:
  1. George Milunovich & Susan Thorp, 2005. "Valuing Volatility Spillovers," Research Papers 0506, Macquarie University, Department of Economics.

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