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Red tape asset pricing

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Abstract
The equity premium–risk-free rate puzzle in standard consumption-based asset pricing models disappears once we remove the government-imposed component from the consumption expenditure series. I calibrate this component based on the growth rates of two proxies for government intervention, which I also show to forecast the short- and long-term equity premiums between 1974 (or 1981) and 2017. In summary, investors require large premiums to hold stocks because stocks give poor returns when government intervention increases, thereby systematically reducing individuals’ utility levels.

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  • de Oliveira Souza, Thiago, 2018. "Red tape asset pricing," Discussion Papers on Economics 8/2018, University of Southern Denmark, Department of Economics.
    • Handle: RePEc:hhs:sdueko:2018_008
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    References listed on IDEAS

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    Cited by:

    1. de Oliveira Souza, Thiago, 2019. "Predictability concentrates in bad times. And so does disagreement," Discussion Papers on Economics 8/2019, University of Southern Denmark, Department of Economics.

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    More about this item

    Keywords

    Equity premium puzzle; intervention; regulation; risk;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • H10 - Public Economics - - Structure and Scope of Government - - - General

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