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The equity premium: a deeper puzzle

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  • Francisco Azeredo

Abstract

Traditional pre-1929 consumption measures understate the extent of serial correlation in the US annual real growth rate of per capita consumption of non-durables and services due to measurement limitations in the construction of their major components. Under alternative measures proposed in this study, the serial correlation of consumption growth is $$0.42$$ 0.42 for the $$1899$$ 1899 – $$2012$$ 2012 , contrary to the estimate of $$-0.15$$ - 0.15 under the traditional measures. This new evidence implies that the class of economies studied by Mehra and Prescott (J Monet Econ 15(2):145–161, 1985 ) generates a negative equity premium for reasonable risk aversion levels, thus, further exacerbating the equity premium puzzle. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Francisco Azeredo, 2014. "The equity premium: a deeper puzzle," Annals of Finance, Springer, vol. 10(3), pages 347-373, August.
    • Handle: RePEc:kap:annfin:v:10:y:2014:i:3:p:347-373
    DOI: 10.1007/s10436-014-0248-7
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    Cited by:

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    2. Guglielmo Maria Caporale & Luis A. Gil-Alana & Miguel Martin-Valmayor, 2021. "Persistence in the market risk premium: evidence across countries," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 45(3), pages 413-427, July.
    3. Javier Rojo‐Suárez & Ana Belén Alonso‐Conde & Rubén Lago‐Balsalobre, 2021. "Industry bubbles and the cross‐sectional variation of expected consumption growth," International Review of Finance, International Review of Finance Ltd., vol. 21(3), pages 1047-1055, September.
    4. Dolmas, Jim, 2017. "Campbell and Cochrane meet Melino and Yang: Reverse engineering the surplus ratio in a Mehra–Prescott economy," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 55-62.
    5. Pollak, Andreas, 2022. "A Unified Theory of Growth, Cycles and Unemployment - Part II: Business Cycles and Unemployment," MPRA Paper 117769, University Library of Munich, Germany.

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    More about this item

    Keywords

    US consumption growth; Autoregressive process; Structural break; Persistence; Equity premium puzzle; Neoclassical growth model; E32; E44; G11; G13;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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