Premium
Rational Asset Prices
Author(s) -
Constantinides George M.
Publication year - 2002
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00471
Subject(s) - economics , predictability , equity premium puzzle , recession , dividend , rational expectations , capital asset pricing model , risk premium , equity (law) , financial economics , monetary economics , business cycle , econometrics , macroeconomics , finance , physics , quantum mechanics , political science , law
The mean, covariability, and predictability of the return of different classes of financial assets challenge the rational economic model for an explanation. The unconditional mean aggregate equity premium is almost seven percent per year and remains high after adjusting downwards the sample mean premium by introducing prior beliefs about the stationarity of the price–dividend ratio and the (non)forecastability of the long‐term dividend growth and price—dividend ratio. Recognition that idiosyncratic income shocks are uninsurable and concentrated in recessions contributes toward an explanation. Also borrowing constraints over the investors' life cycle that shift the stock market risk to the saving middle‐aged consumers contribute toward an explanation.