The equity premium: A puzzle

Rajnish Mehra, Edward C. Prescott

Research output: Contribution to journalArticlepeer-review

2556 Scopus citations


Restrictions that a class of general equilibrium models place upon the average returns of equity and Treasury bills are found to be strongly violated by the U.S. data in the 1889-1978 period. This result is robust to model specification and measurement problems. We conclude that, most likely, an equilibrium model which is not an Arrow-Debreu economy will be the one that simultaneously rationalizes both historically observed large average equity return and the small average risk-free return.

Original languageEnglish (US)
Pages (from-to)145-161
Number of pages17
JournalJournal of Monetary Economics
Issue number2
StatePublished - Mar 1985
Externally publishedYes

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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