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Macro midterm spring

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Refers to the inability of an important class of economic models to explain the average premium of the returns on a well-diversified U.S. equity portfolio over U.S. Treasury Bills observed for more than 100 years. the investor returns on equities have been on average so much higher than returns on U.S. Treasury Bonds, that it is hard to explain why investors buy bonds, even after allowing for a reasonable amount of risk aversion. The intuitive notion that stocks are much riskier than bonds is not a sufficient explanation of the observation that the magnitude of the disparity between the two returns, the equity risk premium (ERP), is so great that it implies an implausibly high level of investor risk aversion that is fundamentally incompatible with other branches of economics, particularly macroeconomics and financial economics.

Author: Daniel Ortega


Equity-Premium Puzzle

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