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Log-Normal Approximation of the Equity Premium in the Production Model

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  • Burkhard Heer
  • Alfred Maussner

Abstract

The conditional equity premium in the model with production is often approximated by assuming a jointly log-normal distribution of the marginal rate of substitution in consumption and the marginal productivity of capital. We show that, for standard parameterization, this premium is about one third less than that implied by a non-linear approximation of the Euler equations.

Suggested Citation

  • Burkhard Heer & Alfred Maussner, 2010. "Log-Normal Approximation of the Equity Premium in the Production Model," CESifo Working Paper Series 3311, CESifo.
    • Handle: RePEc:ces:ceswps:_3311
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    References listed on IDEAS

    as
    1. Altug,Sumru & Labadie,Pamela, 2008. "Asset Pricing for Dynamic Economies," Cambridge Books, Cambridge University Press, number 9780521875851.
    2. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    equity premium; log-normal approximation; production CAPM;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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