This paper evaluates the magnitude of the equity premium in the
European financial markets of the last twenty years. We document a substantial
decrease in its value, especially after the onset of Great Recession. A habit
consumption model predicts a value for the equity premium much higher than
observed in data. Conversely, a simple general equilibrium model in the spirit
of Mehra and Prescott (1985) is now able to explain the premium without
resorting to extremely high coefficients for risk aversion.
JEL classification numbers: G11, G12, G14.
Keywords: Equity premium puzzle, Habit formation: Stock returns.