Macroeconomic Volatility and the Equity Premium

25 Pages Posted: 16 Jan 2006

See all articles by Keith Sill

Keith Sill

affiliation not provided to SSRN

Date Written: December 28, 2005

Abstract

Recent empirical work documents a decline in the U.S. equity premium and a decline in the standard deviation of real output growth. We investigate the link between aggregate risk and the asset returns in a dynamic production based asset-pricing model. When calibrated to match asset return moments, the model implies that the post-1984 reduction in TFP shock volatility of 60 percent gives rise to a 40 percent decline in the equity premium. Lower macroeconomic risk post-1984 can account for a substantial fraction of the decline in the equity premium.

Keywords: Equity premium

Suggested Citation

Sill, Keith, Macroeconomic Volatility and the Equity Premium (December 28, 2005). FRB Philadelphia Working Paper No. 06-1. Available at SSRN: https://ssrn.com/abstract=875619 or http://dx.doi.org/10.2139/ssrn.875619

Keith Sill (Contact Author)

affiliation not provided to SSRN

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