The Equity Premium and the Risk Free Rate: A Cross Country, Cross Maturity Examination

52 Pages Posted: 11 Oct 2001

See all articles by Fabio Canova

Fabio Canova

Bi norwegian business school

Gianni De Nicolo

Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 1995

Abstract

This paper examines the relationship between the equity premium and the risk free rate at three different maturities using post-1973 data for a panel of seven OECD countries. We show the existence of subsample instabilities, of some cross country differences and of inconsistencies with the expectations theory of the term structure. We perform simulations using a standard consumption based CAPM model and demonstrate that the basic features of Mehra and Prescott's (1985) puzzle remain, regardless of the time period, the investment maturity and the country considered. Modifications of the basic set-up are also considered.

Keywords: Calibration, consumption based CAPM, equity premium, model evaluation, risk free rate, term structure

JEL Classification: C15, E43, G12

Suggested Citation

Canova, Fabio and De Nicolo, Gianni, The Equity Premium and the Risk Free Rate: A Cross Country, Cross Maturity Examination (January 1995). CEPR Discussion Paper No. 1119. Available at SSRN: https://ssrn.com/abstract=286876

Fabio Canova (Contact Author)

Bi norwegian business school ( email )

Nydalsveien 37
Oslo, 0484
Norway

Gianni De Nicolo

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
(410) 234-4507 (Phone)

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

Poschinger Str. 5
Munich, DE-81679
Germany

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