Explaining the Equity Risk Premium

31 Pages Posted: 10 Nov 2006

See all articles by Laurian Lungu

Laurian Lungu

Cardiff Business School

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

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Abstract

We develop a simple overlapping generations model in which the young have a choice in investing in equities or index-linked bonds. Projections of share price uncertainty over a 30-year period show that the risk associated with such long-term investments predicts an equity premium that matches historical values. Moreover, we calibrate the model and show that it can predict up to the fourth moment of both the observed risk premium and the real rate of interest.

Suggested Citation

Lungu, Laurian and Minford, Patrick, Explaining the Equity Risk Premium. Manchester School, Vol. 74, No. 6, pp. 670-700, December 2006. Available at SSRN: https://ssrn.com/abstract=943832 or http://dx.doi.org/10.1111/j.1467-9957.2006.00522.x

Laurian Lungu (Contact Author)

Cardiff Business School ( email )

Aberconway Building
Cardiff CF10 3EU
United Kingdom
+44 29 2087 5129 (Phone)
+44 29 2087 4419 (Fax)

HOME PAGE: http://www.cf.ac.uk/carbs/econ/lungul/

Patrick Minford

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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