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Can rare events explain the equity premium puzzle?

Julliard, Christian and Ghosh, Anisha (2012) Can rare events explain the equity premium puzzle? Review of Financial Studies, 25 (10). pp. 3037-3076. ISSN 0893-9454

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Abstract

Probably not. First, allowing the probabilities of the states of the economy to differ from their sample frequencies, the consumption-CAPM is still rejected in both U.S. and international data. Second, the recorded world disasters are too small to rationalize the puzzle, unless one assumes that disasters occur every 6-10 years. Third, if the data were generated by the rare events distribution needed to rationalize the equity premium puzzle, the puzzle itself would be unlikely to arise. Fourth, the rare events hypothesis, by reducing the cross-sectional dispersion of consumption risk, worsens the ability of the consumption-CAPM to explain the cross-section of returns

Item Type: Article
Official URL: http://rfs.oxfordjournals.org/
Additional Information: © 2012 The Authors
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C11 - Bayesian Analysis
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C14 - Semiparametric and Nonparametric Methods
E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E17 - Forecasting and Simulation
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Sets: Departments > Finance
Collections > Economists Online
Research centres and groups > Financial Markets Group (FMG)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 08 Oct 2012 14:41
URL: http://eprints.lse.ac.uk/46674/

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