The Equity Risk Premium: A Solution Export

@article{citeulike:3332290, abstract = {In 'The equity Risk Premium: A Puzzle', Mehra and Prescott (1985) developed an Arrow-Debreu asset pricing model. They rejected it because it could not explain high enough equity risk premia. They conclude that only non-Arrow-Debreu models would solve this 'puzzle'. Here, I re-specify their model, capturing the effects of possible, though unlikely, market crashes. While maintaining their model's attractive features, this allows it to explain high equity risk premia and low risk-free returns. It does so with reasonable degree of time preference and risk aversion, provided the crashes are plausibly severe and not to improbable.}, author = {Rietz, Thomas A.}, citeulike-article-id = {3332290}, journal = {Journal of Monetary Economics}, keywords = {behaviour, capm, equity, erp, option, smile, tails}, pages = {117--131}, posted-at = {2008-09-24 16:11:06}, priority = {2}, title = {The Equity Risk Premium: A Solution}, volume = {22}, year = {1988} }

TY - JOUR ID - citeulike:3332290 L3 - citeulike-article-id:3332290 N2 - In 'The equity Risk Premium: A Puzzle', Mehra and Prescott (1985) developed an Arrow-Debreu asset pricing model. They rejected it because it could not explain high enough equity risk premia. They conclude that only non-Arrow-Debreu models would solve this 'puzzle'. Here, I re-specify their model, capturing the effects of possible, though unlikely, market crashes. While maintaining their model's attractive features, this allows it to explain high equity risk premia and low risk-free returns. It does so with reasonable degree of time preference and risk aversion, provided the crashes are plausibly severe and not to improbable. JF - Journal of Monetary Economics EP - 131 TI - The Equity Risk Premium: A Solution VL - 22 SP - 117 KW - behaviour KW - capm KW - equity KW - erp KW - option KW - smile KW - tails AU - Rietz, Thomas PY - 1988/// ER -