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Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle

Author

Listed:
  • Constantinides, G.M.
  • Donalson, J.B.
  • Mehra, R.

Abstract

Ongoing questions on the historical mean and standard deviation of the return on equities and bonds and on the equilibrium demand for these securities are addressed in the context of a stationary, overlapping-generations economy in which consumers are subject to a borrowing constraint. The key feature captured by the OLG economy is that the bulk of the future income of the young agents is derived from their wages forthcoming in their middle age, while the bulk of the future income of the middle-aged agents is derived from their savings in equity and bonds.

Suggested Citation

  • Constantinides, G.M. & Donalson, J.B. & Mehra, R., 1997. "Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle," Papers 97-24, Columbia - Graduate School of Business.
  • Handle: RePEc:fth:colubu:97-24
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    References listed on IDEAS

    as
    1. Mehra, Rajnish & Prescott, Edward C., 1988. "The equity risk premium: A solution?," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 133-136, July.
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    Keywords

    EQUITY ; BONDS;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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