The Equity Premium and Risk-Free Rate Puzzles in a Turbulent Economy: Evidence from 105 Years of Data from South Africa

This paper presents a detailed empirical examination of the South African equity premium; and a quantitative theoretic exercise to test the canonical inter-temporal consumption-based asset pricing model under power utility. Over the long run, the South African stock market produced average returns six to eight percentage points above bonds and cash; and at the 20-year horizon, an investor would not have experienced a single negative realised equity premium over the entire 105-year period we examine. Yet, the maximum equity premium rationalised by the consumption based model is 0.4%. The canonical macro-financial model closely matches the average risk-free rate, using realistic parameters for the coefficient of risk aversion and a positive rate of time preference.

Working Paper 156
1 November 2009

2010, South African Journal of Economics
22 September 2012
Publication Type: Working Paper
JEL Code: E21, G12, N27

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