TY  - JOUR
AU  - Jermann,Urban
TI  - The Equity Premium Implied by Production
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12487
PY  - 2006
Y2  - August 2006
UR  - http://www.nber.org/papers/w12487
L1  - http://www.nber.org/papers/w12487.pdf
N1  - Author contact info:
Urban Jermann
Finance Department
Wharton School of the University of Pennsylvania
3620 Locust Walk
Philadelphia, PA  19104
Tel: 215/898-4184
Fax: 215/898-6200
E-Mail: jermann@wharton.upenn.edu
AB  - This paper studies the determinants of the equity premium as implied by producers’ first-order conditions. A closed form expression is presented for the Sharpe ratio at steady-state as a function of investment volatility and adjustment cost curvature. Calibrated to the U.S. postwar economy, the model can generate a sizeable equity premium, with reasonable volatility for market returns and risk free rates. The market’s Sharpe ratio and the market price of risk are very volatile. Contrary to most models, the model generates a negative correlation between conditional means and standard deviations of aggregate excess returns.
ER  -