Overlapping Generations and Representative Agent Models of the Equity Premia: Implications from a Growing Economy.

This paper compares the risk premia on stock (both conditional and unconditional) implied by a class of overlapping generations and re presentative agent models in an exchange economy with stochastic endo wment growth rates. It is shown that, when shocks are independently d istributed, the models are observationally equivalent. However, with positively autocorrelated growth rates, the risk premia can become ne gative in a representative agent model, while bounded above zero in a n overlapping generations model. These results are interpreted via th e consumption-based capital asset pricing model and highlight the end ogenous consumption levels in an overlapping generations model.