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The Equity Premium and Risk-Free Rate Puzzles in a Turbulent Economy: Evidence from 105 Years of Data from South Africa

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  • Shakill Hassan
  • Andrew van Biljon

Abstract

This 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 Info

Paper provided by Economic Research Southern Africa in its series Working Papers with number 156.

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Date of creation: 2009
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Handle: RePEc:rza:wpaper:156

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Related research

Keywords: consumption-based asset pricing; stochastic discount factor; equity risk premium puzzle; risk-free rate; risk aversion coefficient; South Africa;

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Cited by:
  1. 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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