Equity Premium Puzzle in C-CAPM Model

Student: Balakireva Polina

Supervisor: Dmitrii Vyacheslavovich Timofeev

Faculty: Faculty of Economics, Management, and Business Informatics

Educational Programme: Economics (Bachelor)

Final Grade: 9

Year of Graduation: 2016

Equity premium puzzle in intertemporal asset pricing model Consumption-CAPM was studied in this paper. We considered whether there is a puzzle or not on annually data on the USA and Russian stock markets for 1927-2014 and 1996-2014 correspondingly, and monthly data on the USA market for 03.1959-07.2015. Moreover, there was an attempt to solve it by using a habit formation model in the framework of GMM method and by rare events approach. As a result, it was found that both approaches contribute to the normalization of risk-aversion coefficients, which means that the puzzle can be solved mathematically. However, there is no acceptable explanation from the economic point of view, so the problem requires further elaboration.

Full text (added May 15, 2016)

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