Working Paper: CEPR ID: DP5407
Authors: Paul Soderlind
Abstract: Survey and option data are used to take a new look at the equity premium puzzle. Survey data on equity returns (Livingston survey) shows much lower expected excess returns than ex post data. At the same time, option data (CBOE's VIX) indicates that investors overestimate the volatility of equity returns. Both facts reduce the puzzle. However, data on beliefs about output volatility (Survey of Professional Forecasters) shows marked overconfidence. On balance, the equity premium is somewhat less of a puzzle than in ex post data.
Keywords: CBOE VIX; Equity Premium Puzzle; Livingston Survey; Survey of Professional Forecasters
JEL Codes: E130; E320; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk aversion coefficient (D81) | expected excess equity returns (G12) |
| consumption growth (E20) | expected excess equity returns (G12) |
| equity returns (G12) | expected excess equity returns (G12) |
| survey data on beliefs about output volatility (E39) | consumption volatility (E20) |
| implied volatility from options (CBOE VIX) (G17) | actual historical volatility (C58) |
| survey data on beliefs about output growth volatility (E32) | actual volatility (C58) |