We study the contemporaneous and intertemporal partial relation between T-bond pricing and changes in equity risk, as measured by the implied volatility from equity-index options. Our 1992 to 2007 sample is attractive because of the modest inflation risk and sizable time-series variability in equity risk. Over 1997 to 2007 and for inclusive one-half and one-quarter subperiods, we find that the ...

Habit formation has been proposed as a possible solution to the equity premium puzzle. This paper extends the class of models that support the habits explanation in order to account for heterogeneity in earnings, wealth, habits and consumption. I find that habit formation does indeed increase the equity premium. However, contrary to earlier results, the habit hypothesis does not imply a price f...

This paper studies the equilibrium asset pricing implications of time-varying (Knightian) uncertainty regarding economic fundamentals. The paper argues that uncertainty and its variation are important for jointly explaining the equity premium, risk-free rate, and the large variance premium embedded in the “high” price of options. A calibration of the model is able to simultaneously match salien...

Simulating a realistic-sized equity premium in macroeconomic models has proved a daunting challenge, hence the “equity premium puzzle”. “Resolving” the puzzle requires heavy lifting. Precise choices of particular preferences, shocks, technologies, and hard borrowing constraints can do the trick, but haven’t stopped the search for a simpler and more robust solution. This paper suggests that soft...