Dissecting the Equity Premium
Abstract/Contents
- Abstract
- We use option prices and realized returns to decompose risk premia into different parts of the return state space. In the data, 8/10 of the average equity premium is attributable to monthly returns below -10%, but returns below -30% matter very little. In contrast, leading asset pricing models based on habits, long-run risks, rare disasters, undiversifiable idiosyncratic risk, and constrained intermediaries attribute the premium predominantly to returns above -10% or to the extreme left tail. We show that the discrepancy arises from an unrealistically small price of risk for stock market tail events.
Description
| Type of resource | text |
|---|---|
| Date created | July 30, 2021 |
Creators/Contributors
| Author | Beason, Tyler |
|---|---|
| Author | Schreindorfer, David |
| Organizer of meeting | Judd, Kenneth |
| Organizer of meeting | Pohl, Walter |
| Organizer of meeting | Schmedders, Karl |
| Organizer of meeting | Wilms, Ole |
Subjects
| Subject | tail risk |
|---|---|
| Subject | equity premium puzzle |
| Subject | equity index options |
| Subject | Arrow-Debreu securities |
| Subject | rare disasters |
| Subject | long-run risks |
| Subject | external habits |
| Subject | incomplete markets |
| Subject | intermediary asset pricing |
| Genre | Text |
| Genre | Working paper |
| Genre | Grey literature |
Bibliographic information
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- License
- This work is licensed under a Creative Commons Attribution 4.0 International license (CC BY).
Preferred citation
- Preferred citation
- Beason, T. and Schreindorfer, D. (2022). Dissecting the Equity Premium. Stanford Digital Repository. Available at https://purl.stanford.edu/sy737df8136
Collection
SITE Conference 2021
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