Citation

Discussion Paper Details

Please find the details for DP8899 in an easy to copy and paste format below:

Full Details

Title: Can Rare Events Explain the Equity Premium Puzzle?

Author(s): Anisha Ghosh and Christian Julliard

Publication Date: March 2012

Keyword(s): Calibration, Cross-Section of Asset Returns, Equity Premium Puzzle, Generalized Empirical Likelihood, Peso Phenomenon, Rare Disasters, Rare Events and Semi-parametric Bayesian Inference

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: Probably not. First, allowing the probabilities of the states of the economy to differ from their sample frequencies, the Consumption-CAPM is still rejected in both U.S. and international data. Second, the recorded world disasters are too small to rationalize the puzzle unless one assumes that disasters occur every 6-10 years. Third, if the data were generated by the rare events distribution needed to rationalize the equity premium puzzle, the puzzle itself would be unlikely to arise. Fourth, the rare events hypothesis, by reducing the cross-sectional dispersion of consumption risk, worsens the ability of the Consumption-CAPM to explain the cross-section of returns.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8899

Bibliographic Reference

Ghosh, A and Julliard, C. 2012. 'Can Rare Events Explain the Equity Premium Puzzle?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8899