Handbook of the Equity Risk Premium

Discussion: Equity Premia with Benchmark Levels of Consumption: Closed-Form Results

Francisco Gomes

London Business School

1. INTRODUCTION

Andy Abel’s paper discusses the role of preferences with consumption externalities, leveraged equity claims, and non-rational expectations in explaining the equity premium puzzle. The “equity premium puzzle” is a term that is now used to define a 20-year-old literature, started by Mehra and Prescott (1985). In many ways, the search for an answer to this puzzle did for the asset pricing field what the famous search for the proof of Fermat’s last theorem did for the field of mathematics. Searching for the proof of Fermat’s last theorem lasted more than 300 years, drawing the attention of many of the greatest ...