Discussion: “The Worldwide Equity Premium: A Smaller Puzzle” and “History and the Equity Risk Premium”

AbstractThe model of Mehra and Prescott (1985, J. Econometrics, 22, 145-161) implies that reasonable coefficients of risk-aversion of economic agents cannot explain the equity risk premium generated by financial markets. This discrepancy is hitherto regarded as a major financial puzzle. We propose an alternative model to explain the equity premium. For normally distributed returns and for returns far away from normality (but still light tailed), realistic equity risk premia do not imply puzzlingly high risk aversions. Following our approach, the ‘equity premium puzzle’ does not exist. We also consider fat-tailed return distributions and show that Pareto tails are incompatible with constant relative risk aversion.

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Equity Premium with Habits, Wealth Inequality and Background Risk

Journal of Risk and Financial Management ◽

10.3390/jrfm14070321 ◽

2021 ◽

Vol 14 (7) ◽

pp. 321

Author(s):

Christos I. Giannikos ◽

Georgios Koimisis

Keyword(s):

Asset Pricing ◽

Risk Premium ◽

Equity Premium ◽

Wealth Inequality ◽

Exchange Economy ◽

Background Risk ◽

Equity Risk Premium ◽

Income Uncertainty ◽

Equity Risk ◽

Asset Pricing Puzzles

In an exchange economy with endowment inequality, we investigate how preferences with external habits affect the equity risk premium. We show that the dynamics of external additive habits with wealth inequality are complex when a background risk is present. It is ambiguous whether wealth inequality will increase or decrease the equity premium even when the income uncertainty is low. This result extends literature by suggesting that wealth inequality has a small role in explaining asset pricing puzzles.

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WOULD THERE EVER BE CONSENSUS VALUE AND SOURCE OF THE EQUITY RISK PREMIUM? A REVIEW OF THE EXTANT LITERATURE

International Journal of Theoretical and Applied Finance ◽

10.1142/s021902490600355x ◽

2006 ◽

Vol 09 (02) ◽

pp. 199-215

Author(s):

OLUWATOBI OYEFESO

Keyword(s):

Risk Premium ◽

Equity Premium ◽

Unresolved Issue ◽

Equity Risk Premium ◽

Equity Premium Puzzle ◽

Market Risk Premium ◽

Consensus Value ◽

Equity Risk ◽

Premium Puzzle ◽

The Relationship

This paper reviews the extant studies on the equity premium. While paper attempts to make the review comprehensive, describing all of the work in this area is difficult considering the numerous researches that have been done in this area. Essentially, the paper assesses the relationship between the excess return and the equity risk premium and draws attention to their interchangeable use in the finance literature. Existing literature is reviewed around possible theories explaining the equity premium puzzle and followed by the empirical evidence on the theories. Finally, this paper focuses on the problems of attaining consensus value and source of the market risk premium, which makes equity premium puzzle an unresolved issue among the academics and finance practitioners.

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