A Reconsideration of the Equity Premium Puzzle
This paper develops an equilibrium asset pricing framework that allows for investor aggregation, and assumes a log-normally distributed aggregate endowment growth. This framework allows me to derive the equilibrium risk free rate, the expected market return, and expected returns for individual securities. To test how reasonable the results are, I use data of several developed economies from Campbell (2003, 2017) to find a median value of relative risk aversion of 1.57, and a time preference rate of 4.58%. The framework allows me to estimate a version of the CAPM and a multi-period pricing model.
|Date of creation:||24 May 2017|
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- Campbell R. Harvey & Yan Liu & Heqing Zhu, 2016. "Editor's Choice … and the Cross-Section of Expected Returns," Review of Financial Studies, Society for Financial Studies, vol. 29(1), pages 5-68.
- Kewei Hou & Chen Xue & Lu Zhang, 2017. "Replicating Anomalies," NBER Working Papers 23394, National Bureau of Economic Research, Inc.
- Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-455, July. Full references (including those not matched with items on IDEAS)
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