Zusammenfassung
I construct a model of the equity premium that extends Lucas [1978], Mehra and Prescott [1985], and Rietz [1988]. I then calibrate the model using the observed probability distribution for economic disasters in the twentieth century. The model’s solution gets into the right ballpark for explaining the equity-premium and related asset-market puzzles, such as the low real rate of return on government bills. Another mystery that may be resolved is why expected real interest rates were low in the United States during major wars, such as World War II.
