Working Paper: NBER ID: w9525
Authors: Rajnish Mehra; Edward C. Prescott
Abstract: This article takes a critical look at the literature on 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 and the research efforts to enhance the model's ability to replicate the empirical data are summarized.
Keywords: equity premium; financial markets; risk aversion; borrowing constraints; taxes
JEL Codes: D91; E2; E60; G0; G11; G12; G13; H2; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Equity Premium (G19) | Historical Data Analysis (N00) |
| High Equity Premium (G19) | Borrowing Constraints (G51) |
| High Equity Premium (G19) | Taxes (H29) |
| Non-Diversifiable Risk (D81) | Equity Premium (G19) |
| Equity Premium (G19) | Model Predictions (C59) |