Journal of Finance and Investment Analysis

The end of the Equity Premium Puzzle? An analysis of the European Financial Markets

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  • Abstract

     

    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.