DP5017 Explaining The Equity Risk Premium
|Author(s):||Laurian Lungu, Patrick Minford|
|Publication Date:||April 2005|
|Keyword(s):||equity premium puzzle, risk premium|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=5017|
We develop a simple overlapping generations model in which the young have a choice in investing in equities and index-linked bonds. Projections of share price uncertainty over a 30-year period show that the risk associated with such a long-term investment predicts an equity premium that matches historical values.