Exact Value Solution to the Equity Premium Puzzle

TL;DR

This paper provides an exact, calibration-free solution to the equity premium puzzle by deriving model variables from four equations, aligning with empirical data and demonstrating the validity of the CCAPM without calibration.

Contribution

It introduces a new derived model that calculates all variables from four equations, eliminating the need for calibration and aligning with empirical risk behavior studies.

Findings

Calculated subjective time discount factor is 0.9581.

Coefficient of relative risk aversion is 1.0319.

Model aligns with empirical literature and validates CCAPM without calibration.

Abstract

This article's aim is to provide the solution to the equity premium puzzle without using calibrated values. Calibrated values of subjective time discount factor were used in my prior derived models because 4 variables were determined from 3 different equations. Furthermore, calculated values and risk behavior determination of my prior models were compatible with empirical literature. 4 unknown variables are now calculated from 4 different equations in the new derived model in this article. Subjective time discount factor and coefficient of relative risk aversion are found 0.9581 and 1.0319, respectively from the system of equations which are compatible with empirical studies. Micro and macro studies about CRRA value affirm each other for the first time in the literature. Furthermore, equity and risk-free asset investors are pinned down to be insufficient risk-loving, which can be considered a type of risk-averse behavior. Hence it can be said that calculated values and risk attitude determination align with empirical literature. This shows that derived model is valid and make CCAPM work without calibration.