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Equity risk premium and insecure property rights

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  • Konstantin Magin

    (University of California at Berkeley)

Abstract

How much of the equity risk premium puzzle can be attributed to the insecure property rights of shareholders? This paper develops a version of the CCAPM with insecure property rights (stochastic taxes). The model implies that the current expected equity premium can be reconciled with a coefficient of relative risk aversion of 3.76, thus resolving a substantial part of the equity premium puzzle.

Suggested Citation

  • Konstantin Magin, 2015. "Equity risk premium and insecure property rights," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 213-222, October.
    • Handle: RePEc:spr:etbull:v:3:y:2015:i:2:d:10.1007_s40505-014-0043-7
    DOI: 10.1007/s40505-014-0043-7
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    References listed on IDEAS

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    1. Auerbach,Alan J. & Hines, Jr.,James R. & Slemrod,Joel (ed.), 2007. "Taxing Corporate Income in the 21st Century," Cambridge Books, Cambridge University Press, number 9780521870221.
    2. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
    3. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn.
    4. Ellen R. McGrattan & Edward C. Prescott, 2001. "Taxes, Regulations, and Asset Prices," NBER Working Papers 8623, National Bureau of Economic Research, Inc.
    5. Robert H. Edelstein & Konstantin Magin, 2013. "The Equity Risk Premium Puzzle: A Resolution - The Case for Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 35(4), pages 393-406.
    6. Sialm, Clemens, 2006. "Stochastic taxation and asset pricing in dynamic general equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 511-540, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    CCAPM; Equity premium; Property rights; Risk aversion; Stochastic taxation;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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