The equity premium puzzle : a survey of the literature

Abstract

This thesis is a survey of the literature on the equity premium puzzle. The puzzle was introduced in 1985 by Mehra and Prescott, who noted that the huge premium of equities over bonds is not consistent with the predictions of the LucasBreeden representative agent paradigm that governs macroeconomic theory today. This thesis describes the equity premium puzzle, conveys the importance of its implications, and classifies and reviews the approaches to explaining it.