The Equity Premium Implied by Production

Jermann, Urban J.

doi:10.2139/ssrn.906484

Download This Paper

Open PDF in Browser

Add Paper to My Library

The Equity Premium Implied by Production

EFA 2006 Zurich Meetings Paper

39 Pages Posted: 6 Jun 2006

See all articles by Urban J. Jermann

Urban J. Jermann

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

There are 2 versions of this paper

Date Written: August 14, 2006

Abstract

This paper studies the determinants of the equity premium as implied by producers' first-order conditions. A closed form expression is presented for the Sharpe ratio at steady-state as a function of investment volatility and adjustment cost curvature. Calibrated to the U.S. postwar economy, the model can generate a sizeable equity premium, with reasonable volatility for market returns and risk free rates. The market's Sharpe ratio and the market price of risk are very volatile. Contrary to most models, the model generates a negative correlation between conditional means and standard deviations of aggregate excess returns.

Keywords: Equity Premium, Production

JEL Classification: G12, E23

Suggested Citation: Suggested Citation

Jermann, Urban J., The Equity Premium Implied by Production (August 14, 2006). EFA 2006 Zurich Meetings Paper, Available at SSRN: https://ssrn.com/abstract=906484 or http://dx.doi.org/10.2139/ssrn.906484