Discussion Paper 102

The Equity Premium: It's Still a Puzzle

Narayana Kocherlakota | Consultant

Published August 1, 1995

The paper examines the literature that attempts to resolve the equity premium and riskfree rate puzzles. It demonstrates that the puzzles will confront any model of asset prices that relies on three crucial assumptions: preferences have a particular parametric form, asset markets are complete, and asset trade is frictionless. A survey of the literature that relaxes these assumptions reveals that there are now several plausible explanations of the seemingly low riskfree rate, but the large size of the equity premium remains a puzzle.

Published In: Journal of Economic Literature (Vol. 34, No. 1, March 1996, pp. 42-71)

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