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Alternative Resolution to the Mehra?Prescott Puzzle: Verification by the Original Data

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Listed:
  • Hideaki Tamura

    (Graduate School of Economics, Kobe University)

  • Yoichi Matsuabayashi

    (Graduate School of Economics, Kobe University)

Abstract

Many extensive debates followed Mehra and Prescott fs (1985) sensational empirical results concerning the equity premium embodied in household equity portfolios. The problem of the equity premium?the Mehra?Prescott puzzle?arises because researchers overlook the factor of uncertainty in household consumption behaviour, thereby failing to account for the offsetting effect in the intertemporal substitution of consumption. Although many US empirical studies reject the consumption-based capital asset pricing model under a time-separable constant relative risk aversiontype utility function, we resolve this problem by formulating an expandedEuler equation that accommodates uncertainty using Mehra?Prescott fs original data.

Suggested Citation

  • Hideaki Tamura & Yoichi Matsuabayashi, 2016. "Alternative Resolution to the Mehra?Prescott Puzzle: Verification by the Original Data," Discussion Papers 1634, Graduate School of Economics, Kobe University.
    • Handle: RePEc:koe:wpaper:1634
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Intertemporal consumption; Precautionary saving; Uncertainty; Offsetting effect; Euler equation; Equity premium puzzle;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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