11 Pages Posted: 20 Jan 2011
Date Written: December 30, 2010
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.
Keywords: equity premium, log-normal approximation, production CAPM
JEL Classification: G12, C63, E22, E32
Suggested Citation: Suggested Citation
Heer, Burkhard and Maussner, Alfred, Log-Normal Approximation of the Equity Premium in the Production Model (December 30, 2010). CESifo Working Paper Series No. 3311. Available at SSRN: https://ssrn.com/abstract=1742792