The Equity Premium Puzzle: A Reconciliation

29 Pages Posted: 22 Jul 2008 Last revised: 17 Mar 2011

See all articles by Yosef Bonaparte

Yosef Bonaparte

University of Colorado at Denver - Department of Finance

Date Written: July 21, 2008

Abstract

This paper estimates the risk aversion for households accounting for their lifetime consumption risk. Households view the overall lifetime uninsured consumption risk when they optimize resources, which based on micro data varies across households. Thus, representing households’ consumption by merging cross-sectional micro data into the single Euler equation (the common approach taken in the literature) may be too rough an approximation and lead to biased results regarding risk aversion. Our results indicate that rejected asset pricing models fit the data when we account for households' lifetime consumption risk. Our empirical success has also implications on long-run aggregate asset pricing models.

Keywords: The equity premium puzzle, asset pricing, macroeconomics

JEL Classification: G12

Suggested Citation

Bonaparte, Yosef, The Equity Premium Puzzle: A Reconciliation (July 21, 2008). Available at SSRN: https://ssrn.com/abstract=1165782 or http://dx.doi.org/10.2139/ssrn.1165782

Yosef Bonaparte (Contact Author)

University of Colorado at Denver - Department of Finance ( email )

United States

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