TY - JOUR
T1 - Junior can't borrow
T2 - A new perspective on the equity premium puzzle
AU - Constantinides, George M.
AU - Donaldson, John B.
AU - Mehra, Rajnish
N1 - Funding Information:
* We thank Andrew Abel, John Cochrane, Roger Craine, Domenico Cuoco, Steven Davis, the editor Edward Glaeser, John Heaton, Thore Johnsen, Hayne Leland, Robert Lucas, the late Merton Miller, Kevin Murphy, Nicholas Souleles, Nancy Stokey, Jonathan Parker, Raaj Sah, Raman Uppal, three anonymous referees, and participants at numerous conferences and seminars for helpful comments. We are particularly indebted to Edward Prescott for numerous helpful insights and advice on the calibration of our model. We also thank Yu-Hua Chu, Yubo Wang, and Lior Mezly for computational assistance. The usual caveat applies. Constantinides acknowledges financial support from the Center for Research in Security Prices, the University of Chicago. Mehra acknowledges financial support from the Academic Senate of the University of California. Donaldson acknowledges financial support from the Faculty Research fund of the Graduate School of Business, Columbia University. 1. This point is emphasized in Weil [1989].
PY - 2002/2
Y1 - 2002/2
N2 - Ongoing questions on the historical mean and standard deviation of the return on equities and bonds and on the equilibrium demand for these securities are addressed in the context of a stationary, overlapping-generations economy in which consumers are subject to a borrowing constraint. The key feature captured by the OLG economy is that the bulk of the future income of the young consumers is derived from their wages forthcoming in their middle age, while the bulk of the future income of the middle-aged consumers is derived from their savings in equity and bonds. The young would like to borrow and invest in equity but the borrowing constraint prevents them from doing so. The middle-aged choose to hold a diversified portfolio that includes positive holdings of bonds, and this explains the demand for bonds. Without the borrowing constraint, the young borrow and invest in equity, thereby decreasing the mean equity premium and increasing the rate of interest.
AB - Ongoing questions on the historical mean and standard deviation of the return on equities and bonds and on the equilibrium demand for these securities are addressed in the context of a stationary, overlapping-generations economy in which consumers are subject to a borrowing constraint. The key feature captured by the OLG economy is that the bulk of the future income of the young consumers is derived from their wages forthcoming in their middle age, while the bulk of the future income of the middle-aged consumers is derived from their savings in equity and bonds. The young would like to borrow and invest in equity but the borrowing constraint prevents them from doing so. The middle-aged choose to hold a diversified portfolio that includes positive holdings of bonds, and this explains the demand for bonds. Without the borrowing constraint, the young borrow and invest in equity, thereby decreasing the mean equity premium and increasing the rate of interest.
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U2 - 10.1162/003355302753399508
DO - 10.1162/003355302753399508
M3 - Article
AN - SCOPUS:0036487664
SN - 0033-5533
VL - 117
SP - 269
EP - 296
JO - Quarterly Journal of Economics
JF - Quarterly Journal of Economics
IS - 1
ER -