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Anomalies: The Equity Premium Puzzle

  • Jeremy J. Siegel
  • Richard H. Thaler

The equity premium is the difference in returns between equities and fixed income securities, such as Treasury bills. The puzzle refers to the fact that the premium has historically been very large--about 6 percent per year--too large to be easily explained by risk aversion. The authors document the evidence for the puzzle and find that is exists in many countries, over long time periods, and does not seem to be explained by survivorship bias. They also summarize several theoretical explanations. The authors conclude that it is difficult to explain the equity premium without incorporating some kind of irrationality.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.11.1.191
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 11 (1997)
Issue (Month): 1 (Winter)
Pages: 191-200

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Handle: RePEc:aea:jecper:v:11:y:1997:i:1:p:191-200
Note: DOI: 10.1257/jep.11.1.191
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  1. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers 95-05, University of Iowa, Department of Economics.
  2. Andrew B. Abel, 1990. "Asset Prices under Habit Formation and Catching up with the Joneses," NBER Working Papers 3279, National Bureau of Economic Research, Inc.
  3. Kandel, Shmuel & Stambaugh, Robert F., 1991. "Asset returns and intertemporal preferences," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 39-71, February.
  4. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  5. Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
  6. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February.
  7. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
  8. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
  9. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  10. John Y. Campbell, 1996. "Consumption and the Stock Market: Interpreting International Experience," NBER Working Papers 5610, National Bureau of Economic Research, Inc.
  11. Mankiw, N.G. & Zeldes, S.P., 1990. "The Consumption Of Stockholders And Non-Stockholders," Weiss Center Working Papers 23-90, Wharton School - Weiss Center for International Financial Research.
  12. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  13. Andrew B. Abel, 1991. "The equity premium puzzle," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-14.
  14. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
  15. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
  16. Mehra, Rajnish & Prescott, Edward C., 1988. "The equity risk premium: A solution?," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 133-136, July.
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