Average debt and equity returns
Subtitle: puzzling?
By: Ellen R. McGrattan and Edward C. Prescott.
Contributors: Prescott, Edward C.
Series: Federal Reserve Bank of Minneapolis, Research Department staff report ;; 313; Staff report (Federal Reserve Bank of Minneapolis. Research Dept. : Online) ;; 313.
Publisher: Federal Reserve Bank of Minneapolis
Published: 2003
Place of publication: [Minneapolis, Minn.]
Language: eng
Format: Electronic resource
Description: "Mehra and Prescott (1985) found the difference between average equity and debt returns puzzling because it was too large to be a premium for bearing nondiversifiable aggregate risk.  Here, we re-examine this puzzle, taking into account some factors ignored by Mehra and Prescott--taxes, regulatory constraints, and diversification costs--and focusing on long-term rather than short-term savings instruments.  Accounting for these factors, we find the difference between average equity and debt returns during peacetime in the last century is less than 1 percent, with the average real equity return somewhat under 5 percent, and the average real debt return almost 4 percent.  As theory predicts, the real return on debt has been close to the 4 percent average after-tax real return on capital.  Similarly, as theory predicts, the real return on equity is equal to the after-tax real return on capital plus a modest premium for bearing nondiversifiable aggregate risk"--Federal Reserve Bank of Minneapolis web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 11/17/2004.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.