Handbook of the Equity Risk Premium

CHAPTER 8 Understanding the Equity Risk Premium Puzzle

George M. Constantinides^*

University of Chicago and NBER

1. Introduction

2. Habit Persistence

3. Limited Stock Market Participation and Per Capita Consumption

4. Incomplete Markets and Idiosyncratic Income Shocks

5. Concluding Remarks

References

Abstract The unconditional mean of the aggregate equity risk premium is almost 6 percent per year even after adjusting downwards the sample mean premium for unanticipated events in the latter part of the 20th century. In this essay, I present theoretical and empirical research on three classes of generalizations of the standard neoclassical model and discuss their contribution toward a better understanding of the equity risk premium: preferences ...