[PEN-L:12017] re: equity premium puzzle

[James Devine <jdevine@xxxxxxxxxxxxxxx>]

Chuck Higgins wrote:>>Thus premium is not just for volatility--but also for
utility preferences for avoiding volatility.<<

Doug writes:>That's a very fine distinction. Can you explain how it matters?<

I'm no finance economist, but I think the distinction might be defined
better in terms of his phrase the "general gambling/insurance premium." Or
maybe it could be explained in terms of uncertainty: there's more risk to
the equity market that can't be avoided via diversification than there is
in the bond market. I'll ask Chuck, which is easier than finding & reading
the Shiller references.

>And I won't even ask how it is that reality conveniently provides the
increased returns in accordance with CAPM convention. I'm just assuming
that the invisible hand reads the rulebook.<

well, if people don't like volatility and the stock market is relatively
volatile, wouldn't that drive people away from buying stock unless the
return in the stock market were higher in the long run? the reduction of
stock purchases absent the premium would raise the yield on stocks,
producing the premium, right? Again, calling Dr. Chuck.


in pen-l solidarity,

Jim Devine jdevine@xxxxxxxxxxxxxxx
http://clawww.lmu.edu/fall%201997/ECON/jdevine.html
Econ. Dept., Loyola Marymount Univ.
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