Handbook of the Equity Risk Premium

CHAPTER 9 Cash Flow Risk, Discounting Risk, and the Equity Premium Puzzle

Gurdip Bakshi

University of Maryland

Zhiwu Chen^*

Yale University

1. Introduction

2. Economic Determinants of Equity Premium

2.1. Cash Flow Process

2.2. The Discounting Process

2.3. Dynamics of the Market Portfolio

2.4. Dynamics of the Equity Premium

3. Time-Series Data on S&P500 EPS, EPS Growth, and the Interest Rate

4. Implications of the Model for Equity Premium

4.1. How Large Is the Interest-Rate Risk Premium?

4.2. Maximum-Likelihood Estimation of the (Physical) G_t Process

4.3. Compensation for Cash Flow Risk and the Equity Premium

5. Concluding Remarks and Extensions

Appendix

References

Abstract This article investigates the impact of cash flow risk and discounting ...