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The Equity Premium: Why is it a Puzzle?

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Rajnish Mehra

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Abstract

This article takes a critical look at the equity premium puzzle the inability of standard intertemporal economic models to rationalize the statistics that have characterized U.S. financial markets over the past century. A summary of historical returns for the United States and other industrialized countries and an overview of the economic construct itself are provided. The intuition behind the discrepancy between model prediction and empirical data is explained. After detailing the research efforts to enhance the model's ability to replicate the empirical data, I argue that the proposed resolutions fail along crucial dimensions

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9512.

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Date of creation: Feb 2003
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Handle: RePEc:nbr:nberwo:9512

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Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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  1. S. Nuri Erbas & Abbas Mirakhor, 2007. "The Equity Premium Puzzle, Ambiguity Aversion, and Institutional Quality," IMF Working Papers 07/230, International Monetary Fund. [Downloadable!]
  2. Filippo Taddei, 2007. "Equity Premium: Interaction of Belief Heterogeneity and Distribution of Wealth?," Carlo Alberto Notebooks 67, Collegio Carlo Alberto. [Downloadable!]
  3. Christophe Faugere & Julian Van Erlach, 2003. "The Equity Premium: Explained by GDP Growth and Consistent with Portfolio Insurance," Finance 0311004, EconWPA. [Downloadable!]
  4. Fernandez, Pablo, 2003. "75 common and uncommon errors in company valuation," IESE Research Papers Db/515, IESE Business School. [Downloadable!]
    Other versions:
  5. Fernandez, Pablo & Bilan, Andrada, 2007. "110 common errors in company valuations," IESE Research Papers D/714, IESE Business School. [Downloadable!]
  6. Christophe Faugere & Julian Van Erlach, 2004. "A General Theory of Stock Market Valuation and Return," Finance 0403004, EconWPA, revised 17 May 2004. [Downloadable!]
    Other versions:
  7. Rubens Penha Cysne, 2005. "Equity-Premium Puzzle: Evidence From Brazilian Data," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33th Brazilian Economics Meeting] 088, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
    Other versions:
  8. Vance Martin & G.C. Lim & Esfandiar Maasoumi, 2004. "Discounting The Equity Premium Puzzle," Econometric Society 2004 Australasian Meetings 331, Econometric Society. [Downloadable!]
  9. Grammig, Joachim & Schrimpf, Andreas, 2006. "Consumption-Based Asset Pricing with a Reference Level: New Evidence from the Cross-Section of Stock Returns," ZEW Discussion Papers 06-32, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  10. Tsvetanka Karagyozova, 2007. "Asset Pricing with Heterogeneous Agents, Incomplete Markets and Trading Constraints," Working papers 2007-46, University of Connecticut, Department of Economics, revised Sep 2008. [Downloadable!]
  11. Grant, Simon & Quiggin, John, 2003. "The Risk Premium for Equity: Implicatiosn for Resource Allocation, Welfare adn Policy," Working Papers 2003-14, Rice University, Department of Economics. [Downloadable!]
  12. G. M. Constantinides & J. B. Donaldson & R. Mehra, 2005. "Junior must pay: pricing the implicit put in privatizing Social Security," Annals of Finance, Springer, vol. 1(1), pages 1-34, 01. [Downloadable!] (restricted)
    Other versions:
  13. Mark Kamstra & Rpbert J. Shiller, 2008. "The Case for Trills: Giving Canadians and their Pension Funds a Stake in the Wealth of the Nation," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 271, August. [Downloadable!]
  14. Fernandez, Pablo, 2004. "Most common errors in company valuation," IESE Research Papers D/565, IESE Business School. [Downloadable!]
  15. Mark J. Kamstra & Robert J. Shiller, 2009. "The Case for Trills: Giving the People and Their Pension Funds a Stake in the Wealth of the Nation," Cowles Foundation Discussion Papers 1717, Cowles Foundation, Yale University. [Downloadable!]
  16. Rajnish Mehra, 2006. "The Equity Premium in India," NBER Working Papers 12434, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Ferhan Salman, 2005. "Risk Aversion, Sovereign Bonds and Risk Premium," Working Papers 0514, Research and Monetary Policy Department, Central Bank of the Republic of Turkey. [Downloadable!]
  18. Marco Taboga, 2002. "The realized equity premium has been higher than expected: further evidence," Finance 0210004, EconWPA. [Downloadable!]
    Other versions:
  19. Livio Stracca & David Fielding, 2003. "Myopic loss aversion; disappointment aversion; and the equity premium puzzle," Working Paper Series 203, European Central Bank. [Downloadable!]
    Other versions:
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