Futures market approach to understanding equity premium puzzle

Kim, Minseong (2016): Futures market approach to understanding equity premium puzzle.

Abstract

In this paper, another factor that affects equity risk premium is derived from a simple classical monetary model, which basically adds back labor-leisure to a simple consumption-only consumption-based asset pricing model. If every present/future good is traded at time $t=0$, just as in traditional Arrow-Debreu general equilibrium models and understanding bonds as essentially trading labor with future goods, it is inevitable that risk-free bonds have lower interest rate than ideal risk-free bonds of classical monetary models.

• Item Type: MPRA Paper
• Language: English
• Keywords: equity premium puzzle, Arrow-Debreu, futures market, equity risk premium
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing

References

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Waller, C. (2015). Microfoundations of money: why they matter. Federal Reserve Bank of St. Louis Review, Fourth Quarter 2015, 97(4), pp. 289-301.