The equity premium: a deeper puzzle

Azeredo, Francisco

doi:10.1007/s10436-014-0248-7

Cited by 7 publications

(2 citation statements)

References 24 publications

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“…In the present context, this difficulty in calibrating δ or, equivalently, in explaining the low rate of return on the risk-free asset has been dubbed the risk-free rate puzzle by Weil (1989). As noted previously, we read this 12 Azeredo (2012) argues that in the pre-1929 period of the Mehra and Prescott (1985) data set, per capita consumption was mismeasured in the standard reported statistics. If it is measured in a way that is more in keeping with practice in the post-1929 period, the serial correlation in consumption growth over the entire sample period (1889À1978) is 0.42, not À0.14 as Mehra and Prescott (1985) report.…”

Section: Box 102 Calculating the Equilibrium Price Functionmentioning

confidence: 96%

The Consumption Capital Asset Pricing Model

Danthine

Donaldson²

2015

Intermediate Financial Theory

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Section: Box 102 Calculating the Equilibrium Price Functionmentioning

confidence: 96%

The Consumption Capital Asset Pricing Model

Danthine

Donaldson²

2015

Intermediate Financial Theory

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“…Concerning the persistence of the MRP, Dimson et al (2006) found evidence that US HEPs were lower than frequently quoted historical averages, and concluded that their performance cannot contribute to forward-looking equity premia because of its lack of persistence. Other authors tried to estimate the MRP with persistent proxies; for instance, Azeredo (2014) searched for the mechanisms determining the behaviour of the equity premium under persistent consumption growth, and Chang-Jin et al (2004) investigated the relationship between stock market volatility and the equity premium. Finally, Andersen et al (2006) studied the persistence and predictability of the realized betas rather than the MRP.…”

Section: Literature Reviewmentioning

confidence: 99%

Persistence in the market risk premium: evidence across countries

2020

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This paper provides evidence on the degree of persistence of one of the key components of the CAPM, namely the market risk premium, as well as its volatility. The analysis applies fractional integration methods to data for the US, Germany and Japan, and for robustness purposes considers different time horizons (2, 5 and 10 years) and frequencies (monthly and weekly). The empirical findings in most cases imply that the market risk premium is a highly persistent variable which can be characterized as a random walk process, whilst its volatility is less persistent and exhibits stationary long-memory behaviour. There is also evidence that in the case of the US the degree of persistence has changed as a results of various events; this is confirmed by both endogenous break tests and the associated subsample estimates. Market participants should take this evidence into account when designing their investment strategies.

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Campbell and Cochrane meet Melino and Yang: Reverse engineering the surplus ratio in a Mehra–Prescott economy

Dolmas

2017

The North American Journal of Economics and Finance

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The habit model of Campbell and Cochrane (1999) specifies a process for the 'surplus ratio'-the excess of consumption over habit, relative to consumption-rather than an evolution for the habit stock. It's not immediately apparent if their formulation can be accommodated within the Markov chain framework of Mehra and Prescott (1985). This note illustrates one way to create a Campbell and Cochrane-like model within the Mehra-Prescott framework. A consequence is that we can perform another sort of reverse-engineering exercize-we can calibrate the resulting model to match the stochastic discount factor derived in the Mehra-Prescott framework by Melino and Yang (2003). The Melino-Yang SDF, combined with Mehra and Prescott's consumption process, yields asset returns that exactly match the first and second moments of the data, as estimated by Mehra and Prescott. A byproduct of the exercize is an equivalent (in terms of SDFs) representation of Campbell-Cochrane preferences as a state-dependent version of standard time-additively-separable, constant relative risk aversion preferences. When calibrated to exactly match the asset return data, both the utility discount factor and the coefficient of relative risk aversion vary with the Markov state. Not surprisingly, our Campbell-Cochrane preferences are equivalent to a state-dependent representation with strongly countercyclical risk aversion. Less expected is the equivalent utility discount factor-it is uniformly greater than one, and countercyclical. In their analysis, Melino and Yang ruled out state-dependent specifications where the utility discount factor exceeds one. Our model gives one plausible rationalization for such a specification. JEL CODES: E44, G12

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The equity premium: a deeper puzzle

Cited by 7 publications

References 24 publications

The Consumption Capital Asset Pricing Model

The Consumption Capital Asset Pricing Model

Persistence in the market risk premium: evidence across countries

Campbell and Cochrane meet Melino and Yang: Reverse engineering the surplus ratio in a Mehra–Prescott economy

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