%0 Journal Article %1 Rietz:JME:1988 %A Rietz, Thomas A. %D 1988 %J Journal of Monetary Economics %K disaster equity-premium %N 1 %P 117-131 %R http://dx.doi.org/10.1016/0304-3932(88)90172-9 %T The Equity Risk Premium: a Solution %U http://www.sciencedirect.com/science/article/pii/0304393288901729 %V 22 %X In ‘The Equity Risk Premium: A Puzzle’, Mehra and Prescott (1985) developed an Arrow-Debreau asset pricing model. They rejected it because it could not explain high enough equity risk premia. They concluded that only non-Arrow-Debreu models would solve this ‘puzzle’. Here, I re-specify their model, capturing the effects of possible, though unlikely, market crashes. While maintaining their model's attractive features, this allows it to explain high equity risk premia and low risk-free returns. It does so with reasonable degrees of time preference and risk aversion, provided the crashes are plausibly severe and not too improbable.

@article{Rietz:JME:1988, abstract = {In ‘The Equity Risk Premium: A Puzzle’, Mehra and Prescott (1985) developed an Arrow-Debreau asset pricing model. They rejected it because it could not explain high enough equity risk premia. They concluded that only non-Arrow-Debreu models would solve this ‘puzzle’. Here, I re-specify their model, capturing the effects of possible, though unlikely, market crashes. While maintaining their model's attractive features, this allows it to explain high equity risk premia and low risk-free returns. It does so with reasonable degrees of time preference and risk aversion, provided the crashes are plausibly severe and not too improbable. }, added-at = {2014-10-13T22:19:03.000+0200}, author = {Rietz, Thomas A.}, biburl = {https://www.bibsonomy.org/bibtex/246dcfad4382b98464d00e3e2499856d7/fcqms}, description = {The equity risk premium a solution}, doi = {http://dx.doi.org/10.1016/0304-3932(88)90172-9}, interhash = {08b6b6d3ac8e848d289ad5a1d580fd87}, intrahash = {46dcfad4382b98464d00e3e2499856d7}, issn = {0304-3932}, journal = {Journal of Monetary Economics }, keywords = {disaster equity-premium}, number = 1, pages = {117-131}, timestamp = {2014-10-13T22:19:03.000+0200}, title = {The Equity Risk Premium: a Solution }, url = {http://www.sciencedirect.com/science/article/pii/0304393288901729}, volume = 22, year = 1988 }