Journal of Applied Finance & Banking

The Equity Premium Puzzle Based on a Jump-Diffusion Model

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  • Abstract

    Gong and Zou [1] studied and explained the equity premium puzzle with the domestic output process satisfying a diffusion stochastic differential equation. In this paper, we further study and arrive at a positive solution of the equity premium puzzle based on the domestic output process satisfying a jump-diffusion stochastic differential equation. The conclusions obtained here can be regarded as a natural generalization
    of the work by Gong and Zou [1].

    JEL classification numbers: B26; D53; E17
    Keywords: The equity premium puzzle; The spirit of capitalism; Jump; The stochastic growth model