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Equity Premium

Links

• The Equity Premium Puzzle - Glossary - Dictionary Definition of The Equity Premium Puzzle
• Investopedia.com: The Equity Risk Premium - Part 1
• John Nuttall: Equity Premium Puzzle
• Equity premium puzzle - Wikipedia

"In the US, equities have outperformed bonds by around 7% p.a. for most of the 20th century. Economists have long been puzzled by the magnitude of this outperformance. For sure annual stock returns are more volatile than annual bond returns. But most models used by economists show an equity risk premium of 1 - 2 % maximum. Why should stocks require such a large compensation for their risk.

Benartzi and Thaler (1995) propose an explanation based on prospect theory. What if investors aren't risk-averse over variable returns, but rather they care about the chance of a loss"
Montier (2002) page 23

"...the equity premium, the extra return that people require to be compensated for the risk of investing in the stock market..."
Shiller (2000) [book]

Possible explanations of the equity premium puzzle:

1. The puzzle is an illusion: the empirical data are wrong
2. High risk aversion
3. Nonstandard utility functions
4. Autocorrelation in returns
5. Time varying expected returns
6. Heterogeneous investors

Book

• CORNELL, Bradford, 1999. The Equity Risk Premium : the Long-Run Future of the Stock Market.

Top 10 Papers

1. MEHRA, R., 2003. The Equity Premium: Why is it a Puzzle?. [Cited by 1777] (418.91/year)
2. CONSTANTINIDES, G.M., 1990. Habit Formation: A Resolution of the Equity Premium Puzzle. The Journal of Political Economy. [Cited by 700] (40.60/year)
3. BENARTZI, S. and R.H. THALER, 1995. Myopic Loss Aversion and the Equity Premium Puzzle. The Quarterly Journal of Economics. [Cited by 586] (47.87/year)
4. WEIL, P., 1989. The Equity Premium Puzzle and the Riskfree Rate Puzzle. [Cited by 466] (25.55/year)
5. KOCHERLAKOTA, N.R., 1996. The Equity Premium: It's Still a Puzzle. Journal of Economic Literature. [Cited by 492] (43.76/year)
6. FAMA, E.F. and K.R. FRENCH, 2002. The Equity Premium. The Journal of Finance. [Cited by 241] (45.97/year)
7. MANKIW, N.G., 1987. The Equity Premium and the Concentration of Aggregate Shocks. [Cited by 140] (6.92/year)
8. CONSTANTINIDES, G.M., J.B. DONALDSON and R. MEHRA, 1998. Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle. gsbwww.uchicago.edu. [Cited by 180] (19.48/year)
9. GOYAL, A. and I. WELCH, 2002. Predicting the Equity Premium With Dividend Ratios. [Cited by 152] (29.00/year)
10. MOSKOWITZ, T.J. and A. VISSING-JORGENSEN, 2002. The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?. The American Economic Review. [Cited by 189] (36.06/year)

Bibliography

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• CONSTANIDES, G.M., 1990. Habit Formation: A Resolution of the Equity Premium Puzzle. Journal of Political Economy. [Cited by 12] (0.70/year)
• CONSTANTINIDES, G.M., 1990. Habit Formation: A Resolution of the Equity Premium Puzzle. The Journal of Political Economy. [Cited by 700] (40.60/year)
• CONSTANTINIDES, G.M. and D. DUFFIE, 1996. Asset Pricing with Heterogeneous Consumers. The Journal of Political Economy. [Cited by 332] (29.53/year)
• CONSTANTINIDES, G.M., J.B. DONALDSON and R. MEHRA, 1998. Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle. gsbwww.uchicago.edu. [Cited by 180] (19.48/year)
• DAI, Q., 2000. From equity premium puzzle to expectations puzzle: A general equilibrium production economy with …. Unpublished working paper, New York University. [Cited by 11] (1.52/year)
• DANIEL, K. and D. MARSHALL, 2005. EQUITY-PREMIUM AND RISK-FREE-RATE PUZZLES AT LONG HORIZONS. Macroeconomic Dynamics. [Cited by 37] (16.50/year)
• DANTHINE, J.P., J.B. DONALDSON and R. MEHRA, 1992. The Equity Premium and the Allocation of Income Risk. Journal of Economic Dynamics and Control. [Cited by 28] (1.84/year)
• DIMSON, E., P. MARSH and M. STAUNTON, 2003. GLOBAL EVIDENCE ON THE EQUITY RISK PREMIUM. Journal of Applied Corporate Finance. [Cited by 26] (6.13/year)
• EPSTEIN, L.G., et al., 1989. 'First Order'Risk Aversion and the Equity Premium Puzzle. Dept. of Economics and Institute for Policy Analysis, University …. [Cited by 114] (6.25/year)
• FAMA, E.F. and K.R. FRENCH, 2002. The Equity Premium. The Journal of Finance. [Cited by 241] (45.97/year)
• FAMA, E.F. and K.R. FRENCH, 1997. Industry costs of equity. Journal of Financial Economics. [Cited by 572] (55.85/year)
• FAMA, E.F. and R. KENNETH, 2002. French, 2002, The equity premium. Journal of Finance. [Cited by 74] (14.12/year)
• FISHER, S.J., 1994. Asset Trading, Transaction Costs and the Equity Premium. Journal of Applied Econometrics. [Cited by 13] (0.98/year)
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• GOYAL, A. and I. WELCH, 2006. A Comprehensive Look at the Empirical Performance of Equity Premium Prediction. Review of Financial Studies. [Cited by 65] (52.34/year)
• GOYAL, A. and I. WELCH, 2003. The Myth of Predictability: Does the Dividend Yield Forecast the Equity Premium?. Management Science. [Cited by 20] (4.71/year)
• GRANT, S. and J. QUIGGIN, 2003. Public Investment and the Risk Premium for Equity. Economica. [Cited by 14] (3.30/year)
• HALIASSOS, M. and C.C. BERTAUT, 1995. Why do so Few Hold Stocks?. The Economic Journal. [Cited by 191] (15.60/year)
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• JAGANNATHAN, R., E. MCGRATTAN and A. SCHERBINA, 2001. The Declining US Equity Premium. [Cited by 101] (16.18/year)
• JERMANN, U.J., 1998. Asset Pricing in Production Economies. Journal of Monetary Economics. [Cited by 181] (19.58/year)
• KIM, C.J., J.C. MORLEY and C.R. NELSON, 2004. Is There a Positive Relationship between Stock Market Volatility and the Equity Premium?. Journal of Money, Credit & Banking. [Cited by 15] (4.63/year)
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• LETTAU, M., 1994. … Risk and Volatility Bounds, or, Can Models with Idiosyncratic Risk Solve the Equity Premium Puzzle?. European Economic Review. [Cited by 17] (1.28/year)
• LETTAU, M., S. LUDVIGSON and J. WACHTER, 2004. The Declining Equity Premium: What Role Does Macroeconomic Risk Play?. [Cited by 41] (12.65/year)
• LI, H. and Y. XU, 2002. Survival Bias and the Equity Premium Puzzle. The Journal of Finance. [Cited by 19] (3.62/year)
• LONGSTAFF, F. and M. PIAZZESI, 2004. Corporate Earnings and the Equity Premium. Journal of Financial Economics. [Cited by 16] (4.94/year)
• MANKIW, N.G., 1987. The Equity Premium and the Concentration of Aggregate Shocks. [Cited by 140] (6.92/year)
• MCGRATTAN, E.R. and E.C. PRESCOTT, 2003. Average Debt and Equity Returns: Puzzling?. The American Economic Review. [Cited by 57] (13.44/year)
• MEHRA, R., 2003. The Equity Premium: Why is it a Puzzle?. [Cited by 1777] (418.91/year)
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• MEHRA, R. and E.C. PRESCOTT, 2003. The Equity Premium in Retrospect. [Cited by 76] (17.92/year)
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• MELINO, A. and A.X. YANG, 2003. State Dependent Preferences Can Explain the Equity Premium Puzzle. Review of Economic Dynamics. [Cited by 22] (5.19/year)
• MOSKOWITZ, T.J. and A. VISSING-JORGENSEN, 2002. The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?. The American Economic Review. [Cited by 189] (36.06/year)
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• POLK, C., S. THOMPSON and T. VUOLTEENAHO, 2004. New Forecasts of the Equity Premium. [Cited by 15] (4.63/year)
• POLKOVNICHENKO, V., 2004. Limited Stock Market Participation and the Equity Premium. Finance Research Letters. [Cited by 24] (7.40/year)
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• WEIL, P., 1989. The Equity Premium Puzzle and the Riskfree Rate Puzzle. [Cited by 466] (25.55/year)
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• WELCH, I., 2000. Views of Financial Economists on the Equity Premium and Other Issues. Journal of Business. [Cited by 19] (2.62/year)
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• YAN, H., 1998. Estimation uncertainty and the equity premium. [Cited by 10] (1.08/year)
• ZHOU, C., 1999. Informational Asymmetry and Market Imperfections: Another Solution to the Equity Premium Puzzle. The Journal of Financial and Quantitative Analysis. [Cited by 11] (1.33/year)