Finance Papers

Document Type

Journal Article

Date of this Version

2-19-1999

Publication Source

Journal of Monetary Economics

Volume

43

Issue

1

Start Page

3

Last Page

33

DOI

10.1016/S0304-3932(98)00039-7

Abstract

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 riskless bills. This paper analyzes term premia and 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.

Copyright/Permission Statement

© 1999. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

asset pricing, equity premium, risk premium, term premium

Embargo Date

12-30-2000

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Date Posted: 27 November 2017

This document has been peer reviewed.