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The historical magnitude of the equity premium in the US has been the
object of intense study over the last decade. Since the seminal work of
Mehra and Prescott (1985), many authors have modified the basic
theoretical model to account for the wide discrepancy between the time
series generated by a complete markets Arrow-Debreu economy and the
data. In Discussion Paper No. 1119, Research Fellow Fabio Canova
and Gianni De Nicolo document the time series properties of the
equity premium/risk free rate pair for seven countries (Canada, Germany,
France, Italy, Japan, the UK and the US) for three samples
(1973–91, 1973–81 and 1982–91) and for
three holding maturities (3, 6 and 12 months). They show the existence
of sub-sample instabilities, of some cross-country differences and of
inconsistencies with the expectations theory of the term structure. |