Solution to the Equity Premium Puzzle Using the Sufficiency Factor of the Model

TL;DR

This paper introduces a new model incorporating investor risk behavior to solve the equity premium puzzle, with results aligning with empirical data, confirming its validity.

Contribution

It presents a novel model that accounts for investor risk behavior, providing a solution to the longstanding equity premium puzzle.

Findings

Coefficient of relative risk aversion is approximately 1.03

Model assumptions align with empirical studies

Validates the model as a solution to the equity premium puzzle

Abstract

This study provides the solution to the equity premium puzzle. The new model was developed by including the behavior of investors toward risk in financial markets in prior studies. The calculations of this newly tested model show that the value of the coefficient of relative risk aversion is 1.033526 by assuming the value of the subjective time discount factor to be 0.99. Since these values are compatible with the existing empirical studies, they confirm the validity of the newly derived model that provides the solution to the equity premium puzzle.