Red Tape Asset Pricing

Discussion Papers on Business and Economics, University of Southern Denmark, 8/2018

43 Pages Posted: 26 Dec 2018 Last revised: 29 Jan 2019

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

affiliation not provided to SSRN; University of Southern Denmark

Multiple version iconThere are 2 versions of this paper

Date Written: January 28, 2019

Abstract

The equity premium–risk-free rate puzzle in standard consumption-based asset pricing models disappears once we remove the government-imposed component from the consumption expenditure series. I calibrate this component based on the growth rates of two proxies for government intervention, which I also show to forecast the short- and long-term equity premiums between 1974 (or 1981) and 2017. In summary, investors require large premiums to hold stocks because stocks give poor returns when government intervention increases, thereby systematically reducing individuals’ utility levels.

Keywords: Equity Premium Puzzle, Intervention, Regulation, Risk

JEL Classification: G1, E1, H1

Suggested Citation

de Oliveira Souza, Thiago and de Oliveira Souza, Thiago, Red Tape Asset Pricing (January 28, 2019). Discussion Papers on Business and Economics, University of Southern Denmark, 8/2018, Available at SSRN: https://ssrn.com/abstract=3297430 or http://dx.doi.org/10.2139/ssrn.3297430

Thiago De Oliveira Souza (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

affiliation not provided to SSRN

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