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.
Read more about this topic: Equity Premium Puzzle
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