Paper #136

Title:

The equity premium and the risk free rate: A cross country, cross maturity examination

Authors:

Fabio Canova and Gianni De Nicolo

Date:

April 1995

Abstract:

This paper examines the relationship between the equity premium and the risk free rate at three different maturities using post 1973 data for a panel of 7 OECD countries. We show the existence of subsample instabilities, of some cross country differences and of inconsistencies with the expectations theory of the term structure. We perform simulations using a standard consumption based CAPM model and demonstrate that the basic features of Mehra and Prescott's (1985) puzzle remain, regardless of the time period, the investment maturity and the country considered. Modifications of the basic setup are also considered.

Area of Research:

Macroeconomics and International Economics

Published in:

IMF staff papers, 50(2), 2003, 222-249

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