The equity premium puzzle is a term coined in 1985 by economists Rajnish Mehra and Edward C. Prescott. It is based on the observation that in order to reconcile the much higher return on equity stock compared to government bonds in the United States, individuals must have implausibly high risk aversion according to standard economics models. Similar situations prevail in many other industrialized countries. The puzzle has led to an extensive research effort in both macroeconomics and finance.

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  • The equity premium puzzle is a term coined in 1985 by economists Rajnish Mehra and Edward C. Prescott. It is based on the observation that in order to reconcile the much higher return on equity stock compared to government bonds in the United States, individuals must have implausibly high risk aversion according to standard economics models. Similar situations prevail in many other industrialized countries. The puzzle has led to an extensive research effort in both macroeconomics and finance. So far a range of useful theoretical tools and several plausible explanations have been presented, but a solution generally accepted by the economics profession remains elusive. In addition to explanations of the puzzle, some deny that there is an equity premium at all; notably, following the stock market crashes of the late 2000s recession, there has been no global equity premium over the 30-year period 1979–2009, as observed by Bloomberg. In the United States, the observed "equity premium"—the risk premium (in fact the historical outperformance) on equity in stocks vs. government bonds—over the past century was approximately 7% per annum. However, over any one decade, the outperformance had great variability—from over 19% in the 1950s to 0.3% in the 1970s. It is this gap that is much larger than would be predicted on the basis of standard models of financial markets and assumptions about risk attitudes. To quantify the level of risk aversion implied if these figures represented the expected outperformance of equities over bonds, investors would have to be indifferent between a bet equally likely to pay $50,000 or $100,000 (an expected value of $75,000) and a certain payoff of $51,209 (Mankiw and Zeldes, 1991).
  • In finanza, l'equity premium puzzle o enigma del premio azionario si riferisce all'osservazione empirica che i rendimenti osservati sui mercati azionari nell'ultimo secolo sono stati superiori a quelli dei titoli di stato; in particolare, il premio per il rischio medio per i titoli azionari nell'ultimo secolo sarebbe pari a circa il 6%, laddove il rendimento medio dei titoli di stato a scadenza breve (considerato una buona approssimazione del rendimento privo di rischio) sarebbe intorno all'1%. Questo fenomeno fu per la prima volta osservato in uno storico lavoro di Mehra e Prescott.
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  • The equity premium puzzle is a term coined in 1985 by economists Rajnish Mehra and Edward C. Prescott. It is based on the observation that in order to reconcile the much higher return on equity stock compared to government bonds in the United States, individuals must have implausibly high risk aversion according to standard economics models. Similar situations prevail in many other industrialized countries. The puzzle has led to an extensive research effort in both macroeconomics and finance.
  • In finanza, l'equity premium puzzle o enigma del premio azionario si riferisce all'osservazione empirica che i rendimenti osservati sui mercati azionari nell'ultimo secolo sono stati superiori a quelli dei titoli di stato; in particolare, il premio per il rischio medio per i titoli azionari nell'ultimo secolo sarebbe pari a circa il 6%, laddove il rendimento medio dei titoli di stato a scadenza breve (considerato una buona approssimazione del rendimento privo di rischio) sarebbe intorno all'1%.
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  • Equity premium puzzle
  • Equity premium puzzle
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