Ch01-The Equity Premium ABCs

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1、ElsUKch01-n50899.pdf2007/9/2512:24pmPage:1Trim:7.5in×9.25inFloats:Top/BotTS:diacriTech,IndiaCHAPTER1TheEquityPremium:ABCsRajnishMehraUniversityofCalifornia,SantaBarbara,andNBERandEdwardC.PrescottArizonaStateUniversityandFederalReserveBankofMinneapolis1.Introduction21.1.AnImportantPreli

2、minaryIssue21.2.DataSources31.3.EstimatesoftheEquityPremium61.4.VariationintheEquityPremiumoverTime92.IstheEquityPremiumduetoaPremiumforBearingNon-DiversifiableRisk?112.1.StandardPreferences14References25AppendixA29AppendixB29AppendixC35AppendixD35JELClassification:G10,G12,D9Keywords:ass

3、etpricing,equityriskpremium,CAPM,consumptionCAPM,riskfreeratepuzzleWethankGeorgeConstantinides,JohnDonaldsonandViralShahforhelpfulcommentsandFranciscoAzeredoforexcellentresearchassistance.HANDBOOKOFTHEEQUITYRISKPREMIUMCopyright
c2008byRajnishMehraandEdwardC.Prescott.Allrightsofreproduc

4、tioninanyformreserved.1ElsUKch01-n50899.pdf2007/9/2512:24pmPage:2Trim:7.5in×9.25inFloats:Top/BotTS:diacriTech,India2Chapter1•TheEquityPremium:ABCs1.INTRODUCTIONTheyear1978sawthepublicationofRobertLucas’seminalpaper“AssetPricesinanExchangeEconomy”inEconometrica.Itspublicationtransformed

5、assetpricingandsubstantiallyraisedthelevelofdiscussion,providingatheoreticalconstructtostudyissuesthatcouldnotbeaddressedwithinthedominantparadigmatthetime,theCapitalAssetPricingModel.1Acrucialinputparameterforusingthelatteristheequitypremium2(thereturnearnedbyabroadmarketindexinexcess

6、ofthatearnedbyarelativelyrisk-freesecurity).Lucas’assetpricingmodelallowedonetoposequestionsaboutthemagnitudeoftheequitypremium.3Inourpaper,“TheEquityPremium:APuzzle,”4wedecidedtoaddressthisissue.Inthischapterwetakearetrospectivelookatouroriginalpaperandshowwhyweconcludedthattheequityp

7、remiumisnotapremiumforbearingnon-diversifiablerisk.5Wecriticallyevaluatethedatasourcesusedtodocumentthepuzzleandtouchonotherissuesthatmaybeofinteresttotheresearcherwhodidnothavearingsideseat20yearsago.Westressthattheperspectiveherecapturesthespiritofouroriginalpaperandnotnecessarilyou