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.
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Famous quotes containing the words equity, premium and/or puzzle:
“If equity and human natural reason were allowed there would be no law, there would be no lawyers.”
—Christina Stead (1902–1983)
“In taking out an insurance policy one pays for it in dollars and cents, always at liberty to discontinue payments. If, however, woman’s premium is a husband, she pays for it with her name, her privacy, her self-respect, her very life, “until death doth part.””
—Emma Goldman (1869–1940)
“—My good friend, quoth I—as sure as I am I—and you are you
—And who are you? said he.—Don’t puzzle me; said I.”
—Laurence Sterne (1713–1768)