Foundations and Trends® in Finance
THE EQUITY PREMIUM PUZZLE
A Review
by Rajnish Mehra (University of California, Santa Barbara & National Bureau of Economic Research)
The Equity Premium Puzzle reviews the literature on this phenomenon from the original papers by Mehra and Prescott to the present. The author shows that the equity premium — the return earned by a broad market index in excess of that earned by a relatively risk-free security — is not a premium for bearing non-diversifiable risk.
The Equity Premium Puzzle - documents the historical equity premium in the United States and in selected countries with significant capital markets.
- examines the question, 'Is the equity premium a premium for bearing non-diversifiable risk?'
- addresses risk and preference based explanations of the equity premium
- reviews the nascent literature that takes as given the findings in Mehra and Prescott (1985) and tries to account for the equity premium by factors other than aggregate risk.
The Equity Premium Puzzle offers a birds-eye view of the literature explained by one of the authors of the pioneering work in this area. This is must reading for all students and scholars of finance and macroeconomics.
Published by Now Publishers and marketed by World Scientific;
Contents:
- Introduction
- Empirical Facts
- Is the Equity Premium a Premium for
Bearing Non- diversifiable Risk?
- Risk Based Explanations of the Equity Premium
- Non-risk Based Explanations of the Equity Premium
- Concluding Comments
- References
Readership: Academic and professional, graduate students in finance and
macroeconomics.
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