Scandinavian Working Papers in Economics
Discussion Papers on Economics,
University of Southern Denmark, Department of Economics
No 8/2018: Red tape asset pricing
Thiago de Oliveira Souza ()
Additional contact information
Thiago de Oliveira Souza: Department of Business and Economics, Postal: University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark
Abstract: The equity premium–risk-free rate puzzle in standard consumption-based asset pricing models disappears once we remove the government-imposed component from the consumption expenditure series. I calibrate this component based on the growth rates of two proxies for government intervention, which I also show to forecast the short- and long-term equity premiums between 1974 (or 1981) and 2017. In summary, investors require large premiums to hold stocks because stocks give poor returns when government intervention increases, thereby systematically reducing individuals’ utility levels.
Keywords: Equity premium puzzle; intervention; regulation; risk
42 pages, December 6, 2018
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