What Is the Equity Premium Puzzle?

The equity premium puzzle was first proposed by Rajnish Mehra and Prescott in 1985. They analyzed the historical data of the United States over the past century and found that the The yield is 7.9%, while the corresponding risk-free securities yield is only 1%, of which the premium is 6.9%. The stock yield is far higher than the yield of Treasury bills. Further, the analysis of data from other developed countries from 1947 to 1998 found that there were also different degrees of premium.

The mystery of equity premium

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Explanations of the mystery of equity premium have also emerged endlessly. Classical theory cannot reasonably explain the phenomenon of high equity premium in the market. Later researchers made a series of amendments to the classic theory and proposed various explanations ^. .