Premium
Asset trading, transaction costs and the equity premium
Author(s) -
Fisher Stephen J.
Publication year - 1994
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950090505
Subject(s) - equity premium puzzle , economics , econometrics , equity (law) , transaction cost , equity risk , liquidity premium , capital asset pricing model , financial economics , risk premium , ask price , bid–ask spread , instrumental variable , monetary economics , microeconomics , market liquidity , finance , private equity , political science , law , liquidity crisis
A model is developed that attempts to explain the historical size of the US equity premium by distinguishing between gross and net returns accruing to agents. The model derived by Mehra and Prescott (1985) is augmented with a bid–ask spread, calibrated and simulated. Equity premia in the order of 3–4% are generated for plausible values of the transactions parameters. This contrasts with Mehra and Prescott, who find a maximum equity premium of 0.4% while the historic equity premium has been about 6.2%. Estimates of the bid–ask spread are obtained using GMM and tests of the overidentifying restrictions are not rejected for several lists of instrumental variables.