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The end of the Equity Premium Puzzle? An analysis of the European Financial Markets

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  • Damonte Marco
  • Cardullo Gabriele

Abstract

This paper evaluates the magnitude of the equity premium in the European financial markets of the last twenty years. We document a substantial decrease in its value, especially after the onset of Great Recession. A habit consumption model predicts a value for the equity premium much higher than observed in data. Conversely, a simple general equilibrium model in the spirit of Mehra and Prescott (1985) is now able to explain the premium without resorting to extremely high coefficients for risk aversion. Â JEL classification numbers: G11, G12, G14.

Suggested Citation

  • Damonte Marco & Cardullo Gabriele, 2022. "The end of the Equity Premium Puzzle? An analysis of the European Financial Markets," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 11(2), pages 1-2.
    • Handle: RePEc:spt:fininv:v:11:y:2022:i:2:f:11_2_2
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    References listed on IDEAS

    as
    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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    3. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
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    6. Bansal, Ravi & Kiku, Dana & Yaron, Amir, 2012. "An Empirical Evaluation of the Long-Run Risks Model for Asset Prices," Critical Finance Review, now publishers, vol. 1(1), pages 183-221, January.
    7. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    8. Mehra, Rajnish, 2007. "The Equity Premium Puzzle: A Review," Foundations and Trends(R) in Finance, now publishers, vol. 2(1), pages 1-81, September.
    9. Milind M. Shrikhande, 1996. "Nonaddictive habit formation and the equity premium puzzle," FRB Atlanta Working Paper 96-1, Federal Reserve Bank of Atlanta.
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    11. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(3), pages 823-866.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Equity premium puzzle; Habit formation: Stock returns.;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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