This paper examines the extent to which the equity premium puzzle can be resolved by taking account of the fact that stockholders bear a disproportionate share of output uncertainty. We do this in the context of a non-Walrasian RBC model where risk reallocation is justified by borrowing restrictions. The risk shifting mechanism we propose has the same effect as would arise from an increase in t...

Using a two period model with moral hazard and uninsured risk, we argue that the decline in equity premium from its historically high level is due to a gradual elimination of barriers to universal banking. The loan contracts set up by financial intermediaries became more complete in nature with the advent of universal banking in the 90s following the Gramm-Leach-Billy Act. Hence, it is the natu...

Fama and French [2002. The equity premium. Journal of Finance 57, 637–659] estimate the equity premium using dividend growth rates to measure expected rates of capital gain. We apply their method to study the value premium. From 1945 to 2005, the expected value premium is on average 6.1% per annum, consisting of an expected dividend growth component of 4.4% and an expected dividend price ratio ...

We model consumption and dividend growth as di¤erent processes across two latent regimes. We estimate the equilibrium model over 1930-2009 and show that the second regime is associated with recessions, market downturns, higher risk premia, lower consumption and dividend growth, higher volatility of returns and growth rates, and lower market-wide price-dividend ratio. The model performs better a...

Analysis of the equity premium puzzle has focused on private sector capital markets. The object of this paper is to consider the welfare and policy implications of each of the broad classes of explanations of the equity premium puzzle. As would be expected, the greater the deviation from the first-best outcome implied by a given explanation of the equity premium puzzle, the more interventionist...

This study has the aim of empirically testing factors that affect equity risk premium in companies listed on IDX. uses sample data from 34 property and real estate Indonesia Stock Exchange with an observation period 6 years 2015-2020 taken using purposive sampling method. The variables used this are audit tenure, book to market ratio, firm size, leverage, earnings per share. analysis technique ...

Abstract We illustrate the role of left tail dependence—left mean (LTM)—in equity risk premium (ERP) predictability. LTM measures average pairwise dependency among major sectors incorporating shocks imperceptible at aggregate level. LTM, as well variance premium, significantly predicts ERP in and out sample, which is not case with commonly used predictors. find this predictability result procyc...

Our objective in this article is to study analytically the effect of borrowing constraints on asset returns in an economy where agents are heterogenous with respect to their risk aversion. We use asymptotic analysis to characterize the equilibrium in a general equilibrium exchange economy with an arbitrary number of agents who differ in their risk aversion and face limits on borrowing. We find ...

We present the first systematic methods for combining different experts’responses to equity premium surveys. These techniques are based on the observation that the survey data are approximately gamma distributed. This distribution has convenient analytical properties that enable us to address three important problems that investment managers must face. First, we construct probability density fu...

In "The Equity Risk Premium: A Pmxle', Mehra and Prescott (1985) developed an ArrowDebreu asset pricing model. They rejected it because it could not explain high enough equity risk premia. They concluded 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 ...