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Explaining The Equity Risk Premium

  • LAURIAN LUNGU
  • PATRICK MINFORD

We develop a simple overlapping generations model in which the young have a choice in investing in equities or index-linked bonds. Projections of share price uncertainty over a 30-year period show that the risk associated with such long-term investments predicts an equity premium that matches historical values. Moreover, we calibrate the model and show that it can predict up to the fourth moment of both the observed risk premium and the real rate of interest. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd and The University of Manchester.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9957.2006.00522.x
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Article provided by University of Manchester in its journal Manchester School.

Volume (Year): 74 (2006)
Issue (Month): 6 (December)
Pages: 670-700

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Handle: RePEc:bla:manchs:v:74:y:2006:i:6:p:670-700
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