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The Equity Premium Puzzle: A Review

81 Pages Posted: 15 Jun 2010  

Rajnish Mehra

Arizona State University (ASU) - W.P Carey School of Business, Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 14, 2010

Abstract

Over two decades ago, Mehra and Prescott (1985) challenged the finance profession with a poser: the historical US equity premium is an order of magnitude greater than can be rationalized in the context of the standard neoclassical paradigm of financial economics. This regularity, dubbed “the equity premium puzzle,” has spawned a plethora of research efforts to explain it away. In this review, the author takes a retrospective look at the original paper and explains the conclusion that the equity premium is not a premium for bearing non-diversifiable risk.

Keywords: equity premium, investment risk, capital markets, asset prices

Suggested Citation

Mehra, Rajnish, The Equity Premium Puzzle: A Review (June 14, 2010). Foundations and Trends in Finance, Vol. 2, No. 1, pp. 1-81, 2006. Available at SSRN: https://ssrn.com/abstract=1624986

Rajnish Mehra (Contact Author)

Arizona State University (ASU) - W.P Carey School of Business, Department of Economics ( email )

Tempe, AZ 85287-3806
United States
480 965 6335 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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