Equity Premium Puzzle

The equity premium puzzle is a term coined in 1985 by economists Rajnish Mehra and Edward C. Prescott. It is based on the observation that in order to reconcile the much higher returns of stocks compared to government bonds in the United States, individuals must have implausibly high risk aversion according to standard economics models. Similar situations prevail in many other industrialized countries. The puzzle has led to an extensive research effort in both macroeconomics and finance. So far a range of useful theoretical tools and several plausible explanations have been presented, but a solution generally accepted by the economics profession remains elusive.

Read more about Equity Premium PuzzlePossible Explanations, Implications

Other articles related to "equity premium puzzle, equity premium":

Equity Premium Puzzle - Implications
... The magnitude of the equity premium has implications for resource allocation, social welfare, and economic policy ... the following implications of the existence of a large equity premium Macroeconomic variability associated with recessions is expensive ...

Famous quotes containing the words puzzle, equity and/or premium:

    Waiting for the race to become official, he began to feel as if he had as much effect on the final outcome of the operation as a single piece of a jumbo jigsaw puzzle has to its predetermined final design. Only the addition of the missing fragments of the puzzle would reveal if the picture was as he guessed it would be.
    Stanley Kubrick (b. 1928)

    If equity and human natural reason were allowed there would be no law, there would be no lawyers.
    Christina Stead (1902–1983)

    There is little premium in poetry in a world that thinks of Pound and Whitman as a weight and a sampler, not an Ezra, a Walt, a thing of beauty, a joy forever.
    Anna Quindlen (b. 1952)