The Equity Premium: A Deeper Puzzle

Francisco Azeredo

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

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

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Date posted: June 23, 2007 ; Last revised: April 19, 2014

Suggested Citation

Azeredo, Francisco, The Equity Premium: A Deeper Puzzle (August 31, 2013). Available at SSRN: https://ssrn.com/abstract=996163 or http://dx.doi.org/10.2139/ssrn.996163

Contact Information

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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