The Equity Premium: Why is it a Puzzle?

Posted: 29 Apr 2003

See all articles by Rajnish Mehra

Rajnish Mehra

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

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Abstract

This article takes a critical look at the equity premium puzzle - the inability of standard intertemporal economic models to rationalize the statistics that have characterized U.S. financial markets over the past century. A summary of historical returns for the United States and other industrialized countries and an overview of the economic construct itself are provided. The intuition behind the discrepancy between model prediction and empirical data is explained. After detailing the research efforts to enhance the model's ability to replicate the empirical data, I argue that the proposed resolutions fail along crucial dimensions.

Keywords: Investment Theory: CAPM, APT, and other pricing theories; Portfolio Management: asset allocation

Suggested Citation

Mehra, Rajnish, The Equity Premium: Why is it a Puzzle?. Financial Analysts Journal, Vol. 59, No. 1, January/February 2003. Available at SSRN: https://ssrn.com/abstract=390104

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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