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The Equity Premium: A Deeper Puzzle

Posted: 23 Jun 2007 Last revised: 19 Apr 2014

Francisco Azeredo

Northwestern University; University of Chicago - Graham School of General Studies

Date Written: August 31, 2013


Traditional pre-1929 consumption measures understate the extent of serial correlation in the U.S. annual real growth rate of per capita consumption of non-durables and services due to measurement limitations in the construction of their major components. Under alternative measures proposed in this study, the serial correlation of consumption growth is 0.42 for the 1899−2009, contrary to the estimate of −0.15 under the traditional measures. This new evidence implies that the class of economies studied by Mehra and Prescott [1985] generates negative equity premium for reasonable risk aversion levels. Thus further exacerbating the equity premium puzzle.

Keywords: Persistence, Consumption Growth, Equity Premium Puzzle, Neoclassical Growth Model

JEL Classification: E32, E44, G11, G13

Suggested Citation

Azeredo, Francisco, The Equity Premium: A Deeper Puzzle (August 31, 2013). Available at SSRN: or

Francisco Azeredo (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

University of Chicago - Graham School of General Studies ( email )

Chicago, IL
United States

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