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Log-normal approximation of the equity premium in the production model

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Listed:
  • Burkhard Heer
  • Alfred Maußner

Abstract

The conditional equity premium in the model with production is often approximated by assuming a jointly log-normal distribution of the marginal rate of substitution in consumption and the marginal productivity of capital. We show that, for standard parameterization, this premium is about one-third less than that implied by a nonlinear approximation of the Euler equations.

Suggested Citation

  • Burkhard Heer & Alfred Maußner, 2012. "Log-normal approximation of the equity premium in the production model," Applied Economics Letters, Taylor & Francis Journals, vol. 19(5), pages 407-412, March.
    • Handle: RePEc:taf:apeclt:v:19:y:2012:i:5:p:407-412
    DOI: 10.1080/13504851.2011.581201
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    References listed on IDEAS

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    1. Altug,Sumru & Labadie,Pamela, 2008. "Asset Pricing for Dynamic Economies," Cambridge Books, Cambridge University Press, number 9780521875851, September.
    2. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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