Are stock returns too high?

A fast look at the equity risk premium "puzzle". This "puzzle" was laid out by Mehra and Prescott in their 1985 paper. Essentially it says that the risk premium of stocks is higher than should be expected for any "reasonable" level of risk aversion. The solution that seems to make the most sense is that investors are very very concerned about losses and less concerned about gains: which is prospect theory.

  1. Equity premium puzzle

    Nothing new here, but does have a list of possible explanations (and a reminder that not everyone believes there is a puzzle). The equ...

  2. Equity Premium Puzzle - EPP

    An phenomenon that describes the anomalously higher historical real returns of stocks over government bonds. The equity premium, which is...

  3. The Equity Premium Puzzle and Its Possible Explanations , Roberto Pancrazi

    Imagine that you were a little child receiving $100 from your grandmother in 1946. Suppose also, that you were a wanna-be economist who t...

  4. Fama and French on the premium

    Short version? they believe investors now demand a lower return than a century ago and the price appreciation that accompanied this new ...

  5. My favorite academic paper on the puzzle

    By Mehra himself but two decades after the original. This serves as a great review of the literature on the puzzle as well as an update ...

  6. My favorite explanation of the size of the risk premium: prospect theory

    Imagine a world where investors (even long term investors), are petrified of losses (even paper losses). They then demand a high return ...

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