Risk based explanations of the equity premium
By: John Donaldson, Rajnish Mehra.
Contributors: Mehra, Rajnish.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13220.; Working paper series (National Bureau of Economic Research) -- working paper no. 13220.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 101
Subjects: Rate of return -- Econometric models; Risk -- Econometric models
Description: This essay reviews the family of models that seek to provide aggregate risk based explanations for the empirically observed equity premium. Theories based on non-expected utility preference structures, limited financial market participation, model uncertainty and the small probability of enormous losses are detailed. We impose the additional requirements that candidate models yield consistent inter temporal portfolio choice and that a representative agent can be constructed which is independent of the underlying heterogeneous economy's initial wealth distribution. While many models are able to replicate a wide variety of financial statistics including the premium, few satisfy these latter criteria as well.
Notes: "July 2007"

Includes bibliographical references (p. 90-101).

Also available in PDF from the NBER world wide web site (www.nber.org).