Working Paper: CEPR ID: DP5017
Authors: Laurian Lungu; Patrick Minford
Abstract: We develop a simple overlapping generations model in which the young have a choice in investing in equities and index-linked bonds. Projections of share price uncertainty over a 30-year period show that the risk associated with such a long-term investment predicts an equity premium that matches historical values.
Keywords: equity premium; puzzle; risk premium
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| long-term investment horizon (G31) | equity risk premium (G12) |
| risk associated with equities (G12) | equity risk premium (G12) |
| duration of investment (C41) | perceived risk (D81) |
| perceived risk (D81) | equity risk premium (G12) |
| long-term uncertainties (D89) | required risk premium (G12) |
| variance of productivity shocks (O49) | risk premium (G19) |
| expected variance of returns (G17) | risk premium (G19) |
| share of wealth invested in equities (G12) | expected variance of returns (G17) |