What drives the compensation in equity markets? This article shows that perceptions of long run growth and economic uncertainty in the economy play an important role in determining the risk in equity markets. The size of the market risk premium, the level of the risk free rate, volatility of asset prices, and differences in the risk compensation across assets are shown to be related to risks pe...

Agents with standard, time-separable preferences do not care about the temporal distribution of risk. This is a strong assumption. For example, it seems plausible that a consumer may …nd persistent shocks to consumption less desirable than uncorrelated ‡uctuations. Such a consumer is said to exhibit temporal risk aversion. This paper examines the implications of temporal risk aversion for asset...

Many stockholders irrationally believe that high recent market returns predict high future market returns. I argue that the presence of these extrapolative investors can help resolve the equity premium puzzle if the elasticity of intertemporal substitution (EIS) is greater than unity. Extrapolators’ overreaction to dividend news generates countercyclical expected returns. Rational investors res...

In this paper we argue that implementing the income in the utility function can considerably contribute to the explanation of the equity premium puzzle. Macroeconomic data from developed and developing countries provides support to this idea. We propose a utility function that includes consumption, income and disentangles dividends as a specific form of income, and price assets using a consumpt...

Existing empirical research investigating the size of the equity premium has largely consisted of a series of innovations around a common theme: producing a better estimate of the equity premium by using better data or a better estimation technique. The equity premium estimate that emerges from most of this work matches one moment of the data alone: the mean difference between an estimate of th...

While the comparative statics of asset demand have been studied extensively, surprisingly little work has been done on the behavior of equilibrium asset prices and returns in response to changes in the supplies of securities. This is despite considerable interest in the equity premium and interest rate puzzles. In this paper, we seek to fill this void for the classic case of a representative ag...