Exact Solutions for Expected Rates of Return Under Markov Regime Switching: Implications for the Equity Premium Puzzle / Andrew B. Abel.

Format:

Book

Author/Creator:

Abel, Andrew B.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4110.

NBER working paper series no. w4110

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Exact Solutions for Expected Rates of Return Under Markov Regime Switching

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1992.

Summary:

This paper derives simple closed-form solutions for expected rates of return on stocks and riskless one-period bills under the assumption that shocks to the growth rates of consumption and dividends are generated by a Markov regime-switching process. These closed-form solutions are used to show that the Markov regime-switching process exacerbates the equity premium puzzle and the risk-free rate puzzle. Three empirical examples illustrate the magnitude of the effects of Markov regime switching on equilibrium expected returns.

Notes:

Print version record

June 1992.