Department of Economics
The Equity Premium: A Deeper Puzzle
- Author(s): Azeredo, Francisco
- et al.
Traditional pre-1930 consumption measures understate the extent of serial correlation in the U.S. annual real growth rate of per capita consumption of non-durables and services due to measurement limitations in the construction of their major components. Under alternative measures proposed in this study, the serial correlation of consumption growth is found to be 0.32, contrary to the original estimate of -0.14. This new evidence implies that the class of dynamic general equilibrium models studied by Mehra and Prescott  generates negative equity premium for reasonable risk-aversion levels, thus further exacerbating the equity premium puzzle.