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A test of the intertemporal asset pricing model

  • Rajnish Mehra
  • Edward C. Prescott

Restrictions that general equilibrium theory place upon average returns are found to be strongly violated by the U.S. data in the 1889–1978 period. This result is robust to model specification and measurement problems. We conclude that equilibrium models which are not Arrow-Debreu economies are needed to rationalize the large average equity premium that prevailed during the last 90 years.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 81.

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Date of creation: 1982
Date of revision:
Publication status: Published in Journal of Monetary Economics (Vol. 15, n.2, March 1985, pp.145-161)
Handle: RePEc:fip:fedmsr:81
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  1. Prescott, Edward C & Mehra, Rajnish, 1980. "Recursive Competitive Equilibrium: The Case of Homogeneous Households," Econometrica, Econometric Society, vol. 48(6), pages 1365-79, September.
  2. Constantinides,George & Duffie,Darrel, 1992. "Asset pricing with heterogeneous consumers," Discussion Paper Serie A 381, University of Bonn, Germany.
  3. Sanford J. Grossman & Robert J. Shiller, 1980. "The Determinants of the Variability of Stock Market Prices," NBER Working Papers 0564, National Bureau of Economic Research, Inc.
  4. Donald J. Brown & Lucinda M. Lewis, 1978. "Myopic Economic Agents," Cowles Foundation Discussion Papers 481, Cowles Foundation for Research in Economics, Yale University.
  5. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-74, May.
  6. Donaldson, John B & Mehra, Rajnish, 1984. "Comparative Dynamics of an Equilibrium Intertemporal Asset Pricing Model," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 491-508, July.
  7. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  8. Prescott, Edward C & Lucas, Robert E, Jr, 1972. "A Note on Price Systems in Infinite Dimensional Space," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(2), pages 416-22, June.
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