Conditional Stochastic Disasters and the Equity Premium Puzzle

<a href="https://embed.stanford.edu/iframe/?url=https%3A%2F%2Fpurl.stanford.edu%2Ffh763mx1721" class="su-underline">Show Content</a>

Abstract/Contents

Abstract: Motivated by Barro’s (2006) approach towards modeling the equity premium, we study the original formulation of the equity premium puzzle as posed by Mehra and Prescott (1985). Firstly, we build a single-regime stochastic model capable of simulating the effects of rare economic disasters. We then extend that into a multi-regime model which allows study of conditional disaster regimes and shocks that are not i.i.d., allowing for the simulation of a robust variety of economic phenomenon. Finally, we examine the results of modeling depression-recession economic cycles with the possibility of recessionary aftershocks following severe depressions. Compared to historical economic data, we conclude that a multi-regime model can account for the observed equity premium while simultaneously producing a plausibly low real rate.

Type of resource	text
Date created	May 2012

Author	Chen, Alex
Primary advisor	Shoven, John
Primary advisor	Judd, Kenneth
Degree granting institution	Stanford University, Department of Economics

Subject	Stanford Department of Economics
Genre	Thesis

Related item	Title 2012 Anna Laura Myers Prize for an Outstanding Thesis
Location	https://purl.stanford.edu/fh763mx1721

Use and reproduction: User agrees that, where applicable, content will not be used to identify or to otherwise infringe the privacy or confidentiality rights of individuals. Content distributed via the Stanford Digital Repository may be subject to additional license and use restrictions applied by the depositor.

Preferred Citation: Chen, Alex. (2012). Conditional Stochastic Disasters and the Equity Premium Puzzle. Stanford Digital Repository. Available at: https://purl.stanford.edu/fh763mx1721

Stanford University, Department of Economics, Honors Theses

Loading usage metrics...