Risk Based Explanations of the Equity Premium

John Donaldson and Rajnish Mehra

No 13220, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D10 D11 D50 D52 D90 D91 E30 G00 G11 G12 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-bec, nep-dge, nep-fmk, nep-mac, nep-rmg and nep-upt
Note: AP
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Citations: View citations in EconPapers (4)

Published as “Risk Based Explanations of the Equity Premium” (with J.B Donaldson) Handbook of Investments: The Handbook of the Equity Risk Premium. ed. by Rajnish Mehra, Elsevier, Amsterdam, 2008, pp 37- 100.

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