Abstract

https://ssrn.com/abstract=476193
 
 

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Exact Solutions for Expected Rates of Return Under Markov Regime Switching: Implications for the Equity Premium Puzzle


Andrew B. Abel


University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

June 1992

NBER Working Paper No. w4110

Abstract:     
This paper derives simple closed-form solutions for expected rates of return on stocks and riskless one-period bills under the assumption that shocks to the growth rates of consumption and dividends are generated by a Markov regime-switching process. These closed-form solutions are used to show that the Markov regime-switching process exacerbates the equity premium puzzle and the risk-free rate puzzle. Three empirical examples illustrate the magnitude of the effects of Markov regime switching on equilibrium expected returns.

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Date posted: January 9, 2007  

Suggested Citation

Abel, Andrew B., Exact Solutions for Expected Rates of Return Under Markov Regime Switching: Implications for the Equity Premium Puzzle (June 1992). NBER Working Paper No. w4110. Available at SSRN: https://ssrn.com/abstract=476193

Contact Information

Andrew B. Abel (Contact Author)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-4801 (Phone)
215-573-7244 (Fax)
HOME PAGE: http://finance.wharton.upenn.edu/~abel/

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