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Discussion Paper Details

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Title: The Equity Premium and the Risk Free Rate: A Cross Country, Cross Maturity Examination

Author(s): Fabio Canova and Gianni de NicolÚ

Publication Date: January 1995

Keyword(s): Calibration, Consumption Based CAPM, Equity Premium, Model Evaluation, Risk Free Rate and Term Structure

Programme Area(s): International Macroeconomics

Abstract: This paper examines the relationship between the equity premium and the risk free rate at three different maturities using post-1973 data for a panel of seven OECD countries. We show the existence of subsample instabilities, of some cross country differences and of inconsistencies with the expectations theory of the term structure. We perform simulations using a standard consumption based CAPM model and demonstrate that the basic features of Mehra and Prescott's (1985) puzzle remain, regardless of the time period, the investment maturity and the country considered. Modifications of the basic set-up are also considered.

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Bibliographic Reference

Canova, F and de NicolÚ, G. 1995. 'The Equity Premium and the Risk Free Rate: A Cross Country, Cross Maturity Examination'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1119