CHAPTER 3 Non-Risk-based Explanations of the Equity Premium

Rajnish Mehra

University of California, Santa Barbara, and NBER

Edward C. Prescott

Arizona State University, and Federal Reserve Bank of Minneapolis

Introduction

1. The Inappropriateness of Using T-Bills as a Proxy for the Intertemporal Marginal Rate of Substitution of Consumption

2. The Effect of Government Regulations and Rules

3. Taxes

4. Borrowing Constraints

5. The Impact of Agent Heterogeneity and Intermediation Costs

6. Concluding Comments

JEL Classification: G10, G12, G28, N42, D9

Keywords: asset pricing, equity risk premium, liquidity, risk free rate, transaction balances, government regulations, taxes, agent heterogeneity, ...

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