The equity premium puzzle with 2 different rates of return definitions : the stochastic nature of their solutions

• Autores: Bertolotto, Manuel Ignacio
• Año de publicación: 2009
• Idioma: inglés
• Tipo de recurso: tesis de maestría
• Colaborador/a o director/a de tesis: Kawamura, Enrique
• Materia: Stocks -- Prices -- Mathematical models.; Acciones (Bolsa) -- Precios -- Modelos matemáticos.
• Institución: Universidad de San Andrés

Fil: Bertolotto, Manuel Ignacio. Universidad de San Andrés. Departamento de Economía; Argentina.
This paper suggests that the models which try to explain the equity premium puzzle underestimate rare economic events. The stochastic nature of the model increases the probability of far-from the mean output levels. A multiplicative-additive random walk formulation is considered, consistent with a fat-tail gaussian distribution. Using Barro s (2009) rate of return de nition, the calibrated model yields an equity premium of 5.8% and a risk-free rate of 1.3%. Taking into account the classical de nition, the solutions are 6% and 1.1% respectively. Adopting the utility formulation of Epstein and Zin (1989), the coeficient of relative risk aversion that best performs is about 1.8 and the intertemporal elasticity of substitution is roughly 1.1. Finally, there follows a calculation of the average probability of an economic contraction higher than 15% in the United States during the period between 1954-2004 by using the probability density function calibrated in the last model specification mentioned above and yields 0.06%.