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The equity premium implied by production

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  • Jermann, Urban J.

Abstract

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.

Suggested Citation

  • Jermann, Urban J., 2010. "The equity premium implied by production," Journal of Financial Economics, Elsevier, vol. 98(2), pages 279-296, November.
  • Handle: RePEc:eee:jfinec:v:98:y:2010:i:2:p:279-296
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    Keywords

    Equity premium Production;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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