The equity risk premium puzzle is that the return on equities has far exceeded the average return on short-term risk-free debt and cannot be explained by conventional representative-agent consumption based equilibrium models. We review a few attempts  to explain this anomaly: 1. Inclusion of highly unlikely events with low probability (Ugly state along with Good and Bad), or market crashes , recently also termed as Black Swans. 2. Slow moving habit  added to the basic power utility function. 3. Allowing for a separation of the inter-temporal elasticity of substitution and risk aversion, combined with consumption and dividend growth rates modeled as containing a small persistent expected growth rate component and a fluctuating volatility which captures time varying economic uncertainty. We explore whether a fusion of the above approaches supplemented with better methods to handle the below reservations would provide a more realistic and yet tractable framework to tackle the various conundrums in the social sciences: 1. Unlimited ability of individuals to invest as compared to their ability to consume. 2. Lack of an objective measuring stick of value which gives rise to heterogeneous preferences and beliefs. 3. Unintended consequences due to the dynamic nature of social systems , where changes can be observed and decisions effected by participants to influence the system. 4. Relaxation of the transversality condition to avoid the formation of asset price bubbles . 5. How durable is durable? Since nothing lasts forever, accounting for durable goods to create a comprehensive measure of consumption volatility. The world we live in produces fascinating phenomenon despite (or perhaps, due to) being a hotchpotch of varying doses of the above elements. The rationale for a unified theory is that beauty can emerge from chaos since the best test for a stew is its taste  .
The equity risk premium puzzle is that the return on equities has far exceeded the average return on short-term risk-free debt and cannot be explained by conventional representative-agent consumption based equilibrium models. We review a few attempts done over the years to explain this anomaly: 1. Inclusion of highly unlikely events with low probability (Ugly state along with Good and Bad), or market crashes / Black Swans. 2. Slow moving habit , or time-varying subsistence level, added to the basic power utility function. 3. A separation of the inter-temporal elasticity of substitution and risk aversion, combined with long run risks which captures time varying economic uncertainty. We explore whether a fusion of the above approaches supplemented with better methods to handle the below reservations would provide a more realistic and yet tractable framework to tackle the various conundrums in the social sciences: 1. Unlimited ability of individuals to invest as compared to their ability to consume. 2. Lack of an objective measuring stick of value 3. Unintended consequences due to the dynamic nature of social systems 4. Relaxation of the transversality condition to avoid the formation of asset price bubbles 5. How durable is durable? Accounting for durable goods since nothing lasts forever The world we live in produces fascinating phenomenon despite (or perhaps, due to) being a hotchpotch of varying doses of the above elements. The rationale for a unified theory is that beauty can emerge from chaos since the best test for a stew is its taste . Many long standing puzzles seem to have been resolved using different techniques. The various explanations need to stand the test of time before acceptance; but then unexpected outcomes set in and new puzzles emerge. As real analysis and limits tell us: We are getting Closer and Closer; Yet it seems we are still Far Far Away.. .
A
done over the years
R
, recently also termed as
/
A
, or time-varying subsistence level,
R
Allowing for a
A
R
consumption and dividend growth rates modeled as containing a small persistent expected growth rate component and a fluctuating volatility
long run risks
D
which gives rise to heterogeneous preferences and beliefs.
D
, where changes can be observed and decisions effected by participants to influence the system.
D
.
R
Since nothing lasts forever, accounting
Accounting
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to create a comprehensive measure of consumption volatility.
since nothing lasts forever
A
. Many long standing puzzles seem to have been resolved using different techniques. The various explanations need to stand the test of time before acceptance; but then unexpected outcomes set in and new puzzles emerge. As real analysis and limits tell us: We are getting Closer and Closer; Yet it seems we are still Far Far Away..