Risk Based Explanations of the Equity Premium

101 Pages Posted: 13 Jul 2007 Last revised: 17 Aug 2010

See all articles by John B. Donaldson

John B. Donaldson

affiliation not provided to SSRN

Rajnish Mehra

Arizona State University (ASU) - W.P Carey School of Business, Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 2007

Abstract

This essay reviews the family of models that seek to provide aggregate risk based explanations for the empirically observed equity premium. Theories based on non-expected utility preference structures, limited financial market participation, model uncertainty and the small probability of enormous losses are detailed. We impose the additional requirements that candidate models yield consistent inter temporal portfolio choice and that a representative agent can be constructed which is independent of the underlying heterogeneous economy's initial wealth distribution. While many models are able to replicate a wide variety of financial statistics including the premium, few satisfy these latter criteria as well.

Suggested Citation

Donaldson, John B. and Mehra, Rajnish, Risk Based Explanations of the Equity Premium (July 2007). NBER Working Paper No. w13220. Available at SSRN: https://ssrn.com/abstract=999871

John B. Donaldson

affiliation not provided to SSRN

No Address Available

Rajnish Mehra (Contact Author)

Arizona State University (ASU) - W.P Carey School of Business, Department of Economics ( email )

Tempe, AZ 85287-3806
United States
480 965 6335 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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