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Macroeconomic volatility and the equity premium

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  • Keith Sill

Abstract

Recent empirical work documents a decline in the U.S. equity premium and a decline in the standard deviation of real output growth. We investigate the link between aggregate risk and the asset returns in a dynamic production based asset-pricing model. When calibrated to match asset return moments, the model implies that the post-1984 reduction in TFP shock volatility of 60 percent gives rise to a 40 percent decline in the equity premium. Lower macroeconomic risk post-1984 can account for a substantial fraction of the decline in the equity premium.

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  • Keith Sill, 2006. "Macroeconomic volatility and the equity premium," Working Papers 06-1, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:06-1
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    Cited by:

    1. Addessi, William & Busato, Francesco, 2009. "Fair wages, labor relations and asset returns," Journal of Financial Stability, Elsevier, vol. 5(4), pages 410-430, December.

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    Equity; Macroeconomics;

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