DP5017 Explaining The Equity Risk Premium

Author(s): Laurian Lungu, Patrick Minford
Publication Date: April 2005
Keyword(s): equity premium puzzle, risk premium
JEL(s): G12
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.