The Equity Premium Implied by Production

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Finance Papers
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Finance
Finance and Financial Management
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Jermann, Urban J
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This paper studies the determinants of the equity premium as implied by producers’ first-order conditions. A simple closed form expression is presented for the Sharpe ratio as a function of investment volatility and technology parameters. Calibrated to the US postwar economy, the model can match the historical first and second moments of the market return and the risk-free interest rate. The model also generates a very volatile Sharpe ratio and market price of risk.

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2010-01-01
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Journal of Financial Economics
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