Log-Normal Approximation of the Equity Premium in the Production Model
University of Augsburg; CESifo (Center for Economic Studies and Ifo Institute)
University of Augsburg - Faculty of Business and Economics
December 30, 2010
CESifo Working Paper Series No. 3311
The conditional equity premium in the model with production is often approximated by assuming a jointly log-normal distribution of the marginal rate of substitution in consumption and the marginal productivity of capital. We show that, for standard parameterization, this premium is about one third less than that implied by a non-linear approximation of the Euler equations.
Number of Pages in PDF File: 11
Keywords: equity premium, log-normal approximation, production CAPM
JEL Classification: G12, C63, E22, E32
Date posted: January 20, 2011
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