Date of this Version
Journal of Monetary Economics
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.
© 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/
asset pricing, equity premium, risk premium, term premium
Abel, A. B. (1999). Risk Premia and Term Premia in General Equilibrium. Journal of Monetary Economics, 43 (1), 3-33. http://dx.doi.org/10.1016/S0304-3932(98)00039-7
Date Posted: 27 November 2017
This document has been peer reviewed.