Log-Normal Approximation of the Equity Premium in the Production Model

11 Pages Posted: 20 Jan 2011  

Burkhard Heer

University of Augsburg; CESifo (Center for Economic Studies and Ifo Institute)

Alfred Maussner

University of Augsburg - Faculty of Business and Economics

Date Written: December 30, 2010

Abstract

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

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

Burkhard Heer (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Alfred Maussner

University of Augsburg - Faculty of Business and Economics ( email )

Universitaetsstr. 16
86135 Augsburg
Germany
+49 821 598 4187 (Phone)
+49 821 598 4231 (Fax)

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