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The equity premium and the risk free rate: A cross country, cross maturity examination

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  • Fabio Canova

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  • Gianni De Nicolo

Abstract

This paper examines the relationship between the equity premium and the risk free rate at three different maturities using post 1973 data for a panel of 7 OECD countries. We show the existence of subsample instabilities, of some cross country differences and of inconsistencies with the expectations theory of the term structure. We perform simulations using a standard consumption based CAPM model and demonstrate that the basic features of Mehra and Prescott's (1985) puzzle remain, regardless of the time period, the investment maturity and the country considered. Modifications of the basic setup are also considered.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/136.pdf
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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 136.

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Date of creation: Apr 1995
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Handle: RePEc:upf:upfgen:136

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Web page: http://www.econ.upf.edu/

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Cited by:
  1. Cysne, Rubens Penha, 2005. "Equity-Premium Puzzle: Evidence From Brazilian Data," Economics Working Papers (Ensaios Economicos da EPGE) 586, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  2. Fabio Canova & Eva Ortega, 1996. "Testing calibrated general equilibrium models," Economics Working Papers 166, Department of Economics and Business, Universitat Pompeu Fabra.

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