TY  - JOUR
AU  - Abel,Andrew B.
TI  - Exact Solutions for Expected Rates of Return Under Markov Regime Switching:  Implications for the Equity Premium Puzzle
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4110
PY  - 1992
Y2  - June 1992
UR  - http://www.nber.org/papers/w4110
L1  - http://www.nber.org/papers/w4110.pdf
N1  - Author contact info:
Andrew B. Abel
Wharton School
University of Pennsylvania
2315 Steinberg Hall - Dietrich Hall
Philadelphia, PA  19104-6367
Tel: 215/898-4801
Fax: 215/573-7244
E-Mail: abel@wharton.upenn.edu
AB  - This paper derives simple closed-form solutions for expected rates of return on stocks and riskless one-period bills under the assumption that shocks to the growth rates of consumption and dividends are generated by a Markov regime-switching process. These closed-form solutions are used to show that the Markov regime-switching process exacerbates the equity premium puzzle and the risk-free rate puzzle. Three empirical examples illustrate the magnitude of the effects of Markov regime switching on equilibrium expected returns.
ER  -