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Asset Trading, Transaction Costs and the Equity Premium

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  • Fisher, Stephen J

Abstract

A model is developed that attempts to explain the historical size of the U.S. equity premium by distinguishing between gross and net returns accruing to agents. The model derived by Mehra and Prescott (1985) is augmented with a bid-ask spread, calibrated and simulated. Equity premia in the order of 3-4% are generated for plausible values of the transactions parameters. This contrasts with Mehra and Prescott, who find a maximum equity premium of 0.4% while the historic equity premium has been about 6.2%. Estimates of the bid-ask spread are obtained using GMM and tests of the overidentifying restrictions are not rejected for several lists of instrumental variables. Copyright 1994 by John Wiley & Sons, Ltd.

Suggested Citation

  • Fisher, Stephen J, 1994. "Asset Trading, Transaction Costs and the Equity Premium," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(S), pages 71-94, Suppl. De.
  • Handle: RePEc:jae:japmet:v:9:y:1994:i:s:p:s71-94
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    Cited by:

    1. Erdem Basci, 2002. "Bond Premium in Turkey," Working Papers 0207, Department of Economics, Bilkent University.
    2. Gregoriou, Andros & Nguyen, Ngoc Dung, 2010. "Stock liquidity and investment opportunities: New evidence from FTSE 100 index deletions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(3), pages 267-274, July.
    3. Mark A. Hooker, 1996. "Maturity structure of term premia with time-varying expected returns," Working Papers 96-4, Federal Reserve Bank of Boston.
    4. repec:uts:finphd:34 is not listed on IDEAS
    5. Marquering, Wessel & Verbeek, Marno, 1999. "An empirical analysis of intertemporal asset pricing models with transaction costs and habit persistence," Journal of Empirical Finance, Elsevier, vol. 6(3), pages 243-265, September.
    6. Bellelah, M.A. & Bellelah, M.O. & Ben Ameur, H. & Ben Hafsia, R., 2017. "Does the equity premium puzzle persist during financial crisis? The case of the French equity market," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 851-866.

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