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The equity premium implied by production

  • Jermann, Urban J.

This paper studies the determinants of the equity premium as implied by producers' first-order conditions. A simple closed form expression is presented for the Sharpe ratio as a function of investment volatility and technology parameters. Calibrated to the US postwar economy, the model can match the historical first and second moments of the market return and the risk-free interest rate. The model also generates a very volatile Sharpe ratio and market price of risk.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 98 (2010)
Issue (Month): 2 (November)
Pages: 279-296

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Handle: RePEc:eee:jfinec:v:98:y:2010:i:2:p:279-296
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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  18. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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