This article uses Bayesian marginal likelihood analysis to compare univariate models of the stock return behavior and test for structural breaks in the equity premium. The analysis favors a model that relates the equity premium to Markov-switching changes in the level of market volatility and accommodates volatility feedback. For this model, there is evidence of a one-time structural break in t...

We review one recent approach to the equity premium puzzle. The key elements of this approach are loss aversion and narrow framing, two well-known features of decisionmaking under risk in experimental settings. In equilibrium, models that incorporate these ideas can generate a large equity premium and a low and stable risk-free rate, even when consumption growth is smooth and only weakly correl...

This paper examines the combined effect of asymmetric information and private entrepreneurial risk aversion on investment decisions. The standard optimal debt contract becomes modified by the introduction of insurance and a risk premium that entrepreneurs demand due to the uncertainty of their investment returns: the private equity premium. In general equilibrium, the private equity premium may...

This paper studies the implications of model uncertainty under stochastic volatility model for equilibrium asset pricing. We derive the equilibrium equity premium and risk-free rate in a pureexchange economy with one representative agent who is averse not only to risk but also to model uncertainty. The results show that robustness increases the equilibrium equity premium while lowers the risk-f...

This paper revisits the time-series relation between the conditional risk premium and variance of the equity market portfolio. The main innovation is that we construct a measure of the ex ante equity market risk premium using corporate bond yield spread data. This measure is forward-looking and does not rely critically on either realized equity returns or instrumental variables. We find strong ...

Ž . One of the expected benefits of membership of the Exchange Rate Mechanism ERM was a reduction in risk which should lead to a lower cost of capital and foster investment and growth. Using the APT, we investigate the behavior of the equity market risk premium for the London Stock Exchange prior to and during sterling’s membership of the ERM. We find that prior to and during the first year of ...