The Equity Premium Puzzle reviews the literature on this phenomenon
from the original papers by Mehra and Prescott to the present. The
author shows that the equity premium -- the return earned by a
broad market index in excess of that earned by a relatively
risk-free security -- is not a premium for bearing
non-diversifiable risk. The Equity Premium Puzzle documents the
historical equity premium in the United States and in selected
countries with significant capital markets, examines the question,
'Is the equity premium a premium for bearing non-diversifiable
risk?', addresses risk and preference based explanations of the
equity premium, and reviews the nascent literature that takes as
given the findings in Mehra and Prescott (1985) and tries to
account for the equity premium by factors other than aggregate
risk. The Equity Premium Puzzle offers a birds-eye view of the
literature explained by one of the authors of the pioneering work
in this area. This is must reading for all students and scholars of
finance and macroeconomics.
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