A New Look at the Equity Premium Puzzle

Abstract

The equity premium puzzle is based on the common observation that in order for stock returns to be much higher than those offered by government bonds in the United States, investors must ultimately have incredibly high risk aversion. This situation is not unique to the United States, as it can be found elsewhere in other industrialized nations. The equity premium puzzle has intrigued many modern finance researchers and much effort has been expended in the pursuit of its root cause. Several theories have been developed exploring possible explanations, but a definitive solution remains undiscovered. In order to evaluate possible sources of further research, we have surveyed financial professionals and find they offer unique insights into possibly solving the equity premium puzzle.