A New Methodology for Studying the Equity Premium

Basu, Parantap; Appelbaum, E.

Abstract

This paper provides a new framework for the derivation and estimation of consumption and equity premium functions. Applying duality in a dynamic context, we show that equity premium and consumption functions can be easily obtained from the indirect utility function. Our new framework, therefore, does not require explicit specification of underlying consumer preferences. Using aggregate US data (1929–2000) we estimate the consumption and equity premium functions using a nonparametric technique. We find that the model does well in explaining the observed smooth consumption patterns and does reasonably well in explaining the high mean and volatility of equity premia.

Citation

Basu, P., & Appelbaum, E. (2010). A New Methodology for Studying the Equity Premium. Annals of Operations Research, 176(1), 109-126. https://doi.org/10.1007/s10479-008-0484-1

• Journal Article Type: Article
• Publication Date: Apr 1, 2010
• Deposit Date: Mar 2, 2010
• Journal: Annals of Operations Research
• Print ISSN: 0254-5330
• Electronic ISSN: 1572-9338
• Publisher: Springer
• Peer Reviewed: Peer Reviewed
• Volume: 176
• Issue: 1
• Pages: 109-126
• DOI: https://doi.org/10.1007/s10479-008-0484-1
• Keywords: Consumption function, Equity premium, Moments.
• Public URL: https://durham-repository.worktribe.com/output/1561028
• Publisher URL: http://springerlink.metapress.com/content/605265g1u15r2223/?p=87238547a8f2406c84ab5a34ad7a6b2e&pi=5