The equity premium puzzle, properly termed the American Equity Premium Puzzle, is one of the most significant empirical anomalies in finance, as it pertains to the observation that the expected return on equities has been consistently higher than that of bonds for many years, and that this...

This study provides a solution of the equity premium puzzle. Questioning the validity of the Arrow-Pratt measure of relative risk aversion for detecting the risk behavior of investors under all conditions, a new tool, that is, the sufficiency factor of the model was developed to analyze the risk...

The equity premium puzzle describes the enigma between the theoretical model of consumption behavior and its empirical calibration. We believe, this puzzle is based on a logical inconsistency in which deterministic and stochastic quantities are not precisely separated: The empirical literature...

Building on evidence that lifetime experiences shape individuals' macroeconomic expectations, we study asset prices in an economy in which a representative agent learns with fading memory about unconditional mean endowment growth. With IID fundamentals, constant risk aversion, and memory decay...

We propose a consumption-based capital asset pricing model (CCAPM) with both aggregate and investment-specific technological changes to identify two risk factors that drive the consumption dynamics and asset prices in the long run. These two long-run risk factors capture the two types of...

This paper shows the success of valuation risk-time‐preference shocks in Epstein-Zin utility-in resolving asset pricing puzzles rests sensitively on the way it is introduced. The specification used in the literature is at odds with several desirable properties of recursive preferences because...

We identify the S-Shaped consumption utility by reconciling consumption decisions with asset returns. Different from the concave-shaped utility, the S-shaped consumption utility predicts a possible negative correlation between low quantiles of consumption growth and asset returns, for which we...

Labor market frictions are crucial for the equity premium in production economies. A dynamic stochastic general equilibrium model with recursive utility, search frictions, and capital accumulation yields a high equity premium of 4.26% per annum, a stock market volatility of 11.8%, and a low...

Share prices fluctuate far more than dividends. In contemporary lit- erature, this excess volatility is usually discussed involving the Camp- bell-Shiller present value identity. In our view, it is more appropriate to model future dividends and prices explicitly as random variables. We refer to...

The Equity risk-premium and volatility puzzle - is it possible to have a high equity premium and a low risk-free rate with a plausible risk aversion- have received a great deal of attention but beyond this question, the fundamental issues of that puzzle are the followings: what are the economic...

We discuss the foreign currency forward premium puzzle in the context of 20 internationally tradable emerging market currencies. We find that since the late 1990s the broad basket of emerging market currencies has provided significant equity-like excess returns against a number of major market...

We propose a new approach for estimating rare disaster event models where we only use U.S. national consumption data as an alternative to the ubiquitous Barro and Urs´ua’s (2008, 2012) multi-country data set. We find that the 2020 COVID crisis unambiguously reveals the presence and...

Findings from brain sciences show that the brain must first optimize on its own internal resources before seeking to optimize on the resources available in the external world. We show that this modest change is perspective, from resource-constrained humans to resource-constrained brains,...

We document that mortgaged homebuyers pay an 11% premium relative to all-cash buyers in residential real estate transactions. This premium far exceeds the 3\% premium implied by a realistically calibrated model of rational home sellers with transaction frictions. We obtain similar results from...

This paper studies time-varying price of risk and volatility in Asia-Pacific forward exchange markets in an attempt to see whether currency risk can be a potential source of risk premium to explain forward premium puzzle. To derive a measure of the risk premium, a conditional version of...

The equity premium puzzle argues that equity risk alone is insufficient to justify observed equity premiums with a reasonable value of risk aversion. Mortgages account for a substantial part of household debt, it is thus necessary to take the mortgage payment obligations into consideration when...

I generalize the long-run risks (LRR) model of Bansal and Yaron (2004) by incorporating recursive smooth ambiguity aversion preferences from Klibanoff et al. (2005, 2009) and time-varying ambiguity. Relative to the Bansal-Yaron model, the generalized LRR model is as tractable but more flexible...

Although the link between risk aversion and diminishing marginal utility of wealth is academically well established, theoretical discussions concerning its empirical validity remain. The presented, review-type paper aims to briefly examine theoretical roots responsible for the different views on...

The forward premium is a notoriously poor predictor of exchange rate movements. This failure must reflect deviations from risk neutrality and/or rational expectations. In addition, a mechanism is needed that generates the appropriate correlation between the forward premium and shocks arising...

The equity premium puzzle, first documented by Mehra and Prescott, refers to the empirical fact that stocks have greatly outperformed bonds over the last century. As Mehra and Prescott point out, it appears difficult to explain the magnitude of the equity premium within the usual economics...

This is a descriptive paper on the excess return from 20 internationally tradable emerging market (EM) currencies. It has two contributions. First, we document stylized facts about EM currencies. For the period starting in the second half of the 1990s and including the two major crises (the 1997...

We solve in closed-form a continuous-time Nash equilibrium model in which a finite number of exponential investors continuously consume and trade strategically with price-impact. Compared to the analogous Pareto-efficient equilibrium model, price-impact has an amplification effect on...

The key insight from this analysis is that monetary policy should be responding more to negative shocks than positive shocks: optimal monetary policy is asymmetric. Moreover, if we take the stance that asset prices indicate a high cost of exposure to long-run risks, this has very interesting...