Essays on the equity premium /
The equity premium puzzle has been a challenge to financial economists since Mehra and Prescott first recognized it in 1985. In the first chapter, important characteristics of the stocks and bond returns are studied based on historical data in the U.S. financial market. Also assumptions of the ass...
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| Format: | Thesis Book |
| Language: | English |
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[Place of publication not identified] :
[publisher not identified] ;
2001.
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| Subjects: | |
| Online Access: | http://proxy.library.tamu.edu/login?url=http://proquest.umi.com/pqdweb?did=729049571&sid=1&Fmt=2&clientId=2945&RQT=309&VName=PQD |
| Summary: | The equity premium puzzle has been a challenge to financial economists since Mehra and Prescott first recognized it in 1985. In the first chapter, important characteristics of the stocks and bond returns are studied based on historical data in the U.S. financial market. Also assumptions of the asset pricing model are explored because modifications of asset pricing model should be combined with loosened assumptions. In the second chapter, the condition that has to be satisfied in combining the habit formation utility and three-generation overlapping generations model for a higher equity premium is discussed. The habit formation utility has been partially successful in deriving a higher Equity Premium compared to the conventional Constant Relative Risk Averse (CRRA) utility. Also a representative investor's portfolio decision over different stages of life is formalized in the three generation overlapping generations model. By performing a comparative static analysis in a three-generation OG model and habit formation utility under the equilibrium of the economy, the relationship between habit parameter ([]) and savings of the middle generation (S₁) is derived. The result implies a consumption path of the representative investor over life for a higher equity premium. This consumption path coincides the U.S. consumption data over different age cohorts. In the third chapter, the study combines habit formation preferences and borrowing constraints in the context of a stationary, three-generation OG model as a solution to the equity premium puzzle. To have a higher equity premium, the rate of return on equity should increase and/or the rate of return on bonds should decrease. To get this effect, this study introduces habit formation preference from the middle generation. For the habit formation utility, consumption level goes up over generations, and to finance the higher future consumption, the current saving increases. The increased saving generates stronger demand for bonds since the middle generation is hedging against future asset return uncertainty and habit forming. By deriving the numerical equilibrium asset prices from the model, higher equity premiums are shown. |
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| Item Description: | Vita. "Major Subject: Economics". |
| Physical Description: | x, 107 leaves : illustrations ; 28 cm. Issued also on microfiche from University Microfilm Inc. |
| Bibliography: | Includes bibliographical references (leaves 95-98). |