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Solution to the Equity Premium Puzzle

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  • Aras, Atilla

Abstract

This study provides a solution of the equity premium puzzle. Questioning the validity of the Arrow-Pratt measure of relative risk aversion for detecting the risk behavior of investors, a new tool in the form of the sufficiency factor of the model was developed to analyze the risk behavior of investors. The calculations of this newly tested model show that the value of the coefficient of relative risk aversion is 1.033526 by assuming the value of the subjective time discount factor as 0.99. Since these values are compatible with the existing empirical studies, they confirm the validity of the newly derived model that provides a solution to the equity premium puzzle.

Suggested Citation

  • Aras, Atilla, 2021. "Solution to the Equity Premium Puzzle," OSF Preprints gj3n2, Center for Open Science.
    • Handle: RePEc:osf:osfxxx:gj3n2
    DOI: 10.31219/osf.io/gj3n2
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