In the United States, a majority of households do not invest directly in equity despite the sizable historical equity premiums.
Clearly, the benchmark economy generates several key features of asset pricing observed in the data, such as high equity premiums, a low and stable risk-free interest rate, and a relatively volatile SR.
Households that do not participate in the equity market forgo the large equity premium.
Mr Greenspan said the market value of assets has been rising faster than gross domestic product growth due to a significant decline in real equity premiums
and the decline in real long-term interest rates.
14) The total number of observations used for the computation of the 6-month and 12-month expected equity premiums are 558 and 531, respectively.
Implication 1 states that the expected equity premiums constructed from survey forecasts are unbiased forecasts of the actual equity premium in the model of Campbell and Cochrane (1999).
Also, it may be argued that the difference between the actual and expected equity premiums stems from economists' consideration of frictions in the market.
The authors argue that, by this metric at least, such utility functions may be very attractive to financial economists: they can generate substantial equity premiums
and, at the same time, make sensible predictions about attitudes toward monetary gambles.
Because the real riskless rate of return apparently did not change much during that five-year period, anything short of such an extraordinary permanent increase in the growth of structural productivity, and thus earnings, (4) implies a significant fall in real equity premiums in those years.
If all of the drop in equity premiums had resulted from a permanent reduction in cyclical volatility, stock prices arguably could have stabilized at their levels in the summer of 2000.
Some decline in equity premiums in the latter part of the 1990s almost surely would have been anticipated as the continuing absence of any business correction reinforced notions of increased secular stability.