The first explanation for the equity premium is that the premium is
rational given an expanded (non-standard) account of preferences. Some
form of habit preference (consumers are very sensitive to falling below
a habitual level of consumption) is the most common expansion of
preference structure.
Campbell and Cochrane, JPE 1999 (#2) is a really great paper taking this
approach.
The second approach is to say that the equity premium is an
accident of history - we in American got lucky (also referred to as the
survivorship bias explanation).
See Goetzman and Jorion JOF 1999 #3 for this approach.
The third approach is that consumers are irrational in some ways. The
latest AER, which I left at home, has a paper in this mold.
Alex
--
Dr. Alexander Tabarrok
Vice President and Director of Research
The Independent Institute
100 Swan Way
Oakland, CA, 94621-1428
Tel. 510-632-1366, FAX: 510-568-6040
Email: [EMAIL PROTECTED]
