Possible Explanations
A large number of explanations for the puzzle have been proposed. These include:
- a contention that the equity premium does not exist: that the puzzle is a statistical illusion,
- modifications to the assumed preferences of investors, and
- imperfections in the model of risk aversion.
Kocherlakota (1996), Mehra and Prescott (2003) present a detailed analysis of these explanations in financial markets and conclude that the puzzle is real and remains unexplained. Subsequent reviews of the literature have similarly found no agreed resolution.
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