NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Equity Premium: Why is it a Puzzle?

Rajnish Mehra

NBER Working Paper No. 9512
Issued in February 2003
NBER Program(s):   AP

This article takes a critical look at the equity premium puzzle the inability of standard intertemporal economic models to rationalize the statistics that have characterized U.S. financial markets over the past century. A summary of historical returns for the United States and other industrialized countries and an overview of the economic construct itself are provided. The intuition behind the discrepancy between model prediction and empirical data is explained. After detailing the research efforts to enhance the model's ability to replicate the empirical data, I argue that the proposed resolutions fail along crucial dimensions

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Document Object Identifier (DOI): 10.3386/w9512

Published:

  • Mehra, Rajnish & Prescott, Edward C., 2003. "The equity premium in retrospect," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 14, pages 889-938 Elsevier.
  • Mehra, Rajnish. "The Equity Premium Puzzle: A Review." Foundations and Trends in Finance 2, 1 (2006): 1-81.

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