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Log-normal approximation of the equity premium in the production model

Authors
Publisher
CESifo München
Publication Date
Keywords
  • G12
  • C63
  • E22
  • E32
  • Ddc:330
  • Equity Premium
  • Log-Normal Approximation
  • Production Capm
  • Risikoprämie
  • Capital Asset Pricing Model
  • Statistische Verteilung
  • Theorie

Abstract

The conditional equity premium in the model with production is often approximated by assuming a jointly log-normal distribution of the marginal rate of substitution in consumption and the marginal productivity of capital. We show that, for standard parameterization, this premium is about one third less than that implied by a non-linear approximation of the Euler equations.

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