Dissecting the Equity Premium

Tyler Beason, David Schreindorfer

Research output: Contribution to journalArticlepeer-review


We use option prices and realized returns to decompose risk premia into different parts of the return state space. In the data, 8/10 of the average equity premium is attributable to monthly returns below 210%, but returns below 230% matter very little. In contrast, prominent asset pricing models based on habits, long-run risks, rare disasters, undiversifiable idiosyncratic risk, and constrained intermediaries attribute the premium predominantly to returns above 210% or to the extreme left tail. We show that the discrepancy arises from an unrealistically small price of risk for stock market tail events in the models.

Original languageEnglish (US)
JournalJournal of Political Economy
StateAccepted/In press - 2022

ASJC Scopus subject areas

  • Economics and Econometrics


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