The Equity Premium and Risk-Free Rate Puzzles in a Turbulent Economy: Evidence from 105 Years of Data from South Africa
AbstractThis paper presents a detailed empirical examination of the South African equity premium; and a quantitative theoretic exercise to test the canonical inter-temporal consumption-based asset-pricing model under power utility. Over the long run, the South African stock market produced average returns six to eight percentage points above bonds and cash; and at the 20-year horizon, an investor would not have experienced a single negative realised equity premium over the entire 105-year period we examine. Yet, the maximum equity premium rationalised by the consumption-based model is 0.4%. The canonical macro-financial model closely matches the average risk-free rate, using realistic parameters for the coefficient of risk aversion and a positive rate of time preference.
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Bibliographic InfoPaper provided by Economic Research Southern Africa in its series Working Papers with number 156.
Date of creation: 2009
Date of revision:
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consumption-based asset pricing; stochastic discount factor; equity risk premium puzzle; risk-free rate; risk aversion coefficient; South Africa;
Other versions of this item:
- Shakill Hassan & Andrew Van biljon, 2010. "The Equity Premium And Risk-Free Rate Puzzles In A Turbulent Economy: Evidence From 105 Years Of Data From South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 78(1), pages 23-39, 03.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- N27 - Economic History - - Financial Markets and Institutions - - - Africa; Oceania
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- Peter Aling & Shakill Hassan, 2011.
"No-Arbitrage One-Factor Models of the South African Term-Structure of Interest Rates,"
246, Economic Research Southern Africa.
- Peter Aling & Shakill Hassan, 2012. "No-Arbitrage One-Factor Models Of The South African Term Structure Of Interest Rates," South African Journal of Economics, Economic Society of South Africa, vol. 80(3), pages 301-318, 09.
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