Risk Premia and Term Premia in General Equilibrium
NBER Working Paper No. 6683
The equity premium consists of a term premium reflecting the longer maturity of equity relative to short-term bills, and a risk premium reflecting the stochastic nature of equity payoffs and the deterministic nature of payoffs on reckless bills. This paper analyzes term premia and the risk premia in a general equilibrium model with catching up with the Joneses preferences and a novel formulation of leverage. Closed-form solutions for moments of asset returns are derived. First-order approximations illustrate the effects of parameters and provide an algorithm to match the means and variances of the riskless rate and the rate of return on equity.
Document Object Identifier (DOI): 10.3386/w6683
Published: Journal of Monetary Economics, Vol. 43, no. 1 (February 1999): 3-33. citation courtesy of
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