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Article: Rational beliefs or distorted beliefs: the equity premium puzzle and micro survey data.
- Article from:
- Southern Economic Journal
- Article date:
- January 1, 2006
- Author:
CopyrightCOPYRIGHT 2006 Southern Economic Association. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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1. Introduction
Since Shiller (1982) and Mehra and Prescott (1985) questioned why the gap between the rates of returns from stocks and bonds is so large, the equity premium puzzle has attracted the attention of many economists. The numerous explanations for the puzzle that have been put forth can be categorized into three approaches. The first approach is to explain the puzzle under full rationality by introducing more complex utility functions. Epstein and Zin (1989) and Weil (1989) use a utility function that breaks the tight relation between the risk aversion coefficient and the elasticity of intertemporal substitution. Constantinides (1990) introduces the ...