Handbook of the Equity Risk Premium

Edited by Rajnish Mehra, this volume focuses on the equity risk premium puzzle, a term coined by Mehra and Prescott in 1985 which encompasses a number of empirical regularities in the prices of capital assets that are at odds with the predictions of standard economic theory.This handbook is indispensable for any serious assessment of the state of the art on the famous equity premium puzzle. I had already read most of its content in previous working papers available in the internet, but having the peer-reviewed version reunited in a unique volume ready for consultation at any time is an invaluable...
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Handbook of the Equity Risk Premium HANDBOOK OF THE EQUITY RISK PREMIUM ebook3600.com HANDBOOKS IN FINANCE Series Editor WILLIAM T. ZIEMBA Advisory Editors KENNETH J. ARROW GEORGE C. CONSTANTINIDES B. ESPEN ECKBO HARRY M. MARKOWITZ ROBERT C. MERTON STEWART C. MYERS PAUL A. SAMUELSON WILLIAM F. SHARPE amsterdam • boston • heidelberg • london new york • oxford • paris • san diego san francisco • singapore • sydney • tokyo HANDBOOK OF THE EQUITY RISK PREMIUM By Rajnish Mehra amsterdam • boston • heidelberg • london new york • oxford • paris • san diego san francisco • singapore • sydney • tokyo Elsevier Radarweg 29, PO Box 211, 1000 AE Amsterdam, The Netherlands Linacre House, Jordan Hill, Oxford OX2 8DP, UK First edition 2008 Copyright  c 2008 Elsevier B.V. All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone (+44) (0) 1865 843830; fax (+44) (0) 1865 853333; email: permissions@elsevier.com. Alternatively you can submit your request online by visiting the Elsevier web site at http://elsevier.com/locate/permissions, and selecting Obtaining permission to use Elsevier material British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress ISBN: 978-0-444-50899-7 For information on all Elsevier publications visit our website at books.elsevier.com Printed and bound in the USA 08 09 10 11 10 9 8 7 6 5 4 3 2 1 Dedicated to my parents to Jyoti and Ravi to Neeru and to Chaitanya This page intentionally left blank Contents List of Contributors xvii Preface xix Introduction to the Series xxiii 1 The Equity Premium: ABCs 1 Rajnish Mehra (UCSB) and Edward C. Prescott (Arizona State) 1. Introduction 2 1.1. An Important Preliminary Issue 2 1.2. Data Sources 3 1.3. Estimates of the Equity Premium 6 1.4. Variation in the Equity Premium Over Time 9 2. Is the Equity Premium Due to a Premium for Bearing Non-Diversifiable Risk? 11 2.1. Standard Preferences 14 References 25 Appendix A 29 Appendix B 29 Appendix C 35 Appendix D 35 2 Risk-Based Explanations of the Equity Premium 37 John B. Donaldson (Columbia) and Rajnish Mehra (UCSB) Introduction 39 1. Alternative Preference Structures 41 1.1. Preliminaries 41 1.2. Coincidence of Risk and Time Preferences in CRRA utility 44 1.3. Separating Risk and Time Preferences: Epstein–Zin and others 46 1.4. Variation in the CRRA and EIS 52 vii viii Contents 1.5. Habit Formation 55 1.6. Behavioral Models 61 1.7. Beyond O ...