Working Paper: NBER ID: w9512
Authors: Rajnish Mehra
Abstract: This article takes a critical look at the equity premium puzzle the inability of standard intertemporal economic models to rationalize the statistics that have characterized U.S. financial markets over the past century. A summary of historical returns for the United States and other industrialized countries and an overview of the economic construct itself are provided. The intuition behind the discrepancy between model prediction and empirical data is explained. After detailing the research efforts to enhance the model's ability to replicate the empirical data, I argue that the proposed resolutions fail along crucial dimensions
Keywords: No keywords provided
JEL Codes: G10; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average annual real return on the US stock market (G17) | equity premium (G12) |
| standard deviation of stock returns (G17) | equity premium (G12) |
| riskiness of stocks (G12) | higher returns on stocks (G12) |
| models used to predict returns (G17) | inadequacy in explaining equity premium (G12) |