Working Paper

Log-Normal Approximation of the Equity Premium in the Production Model

Burkhard Heer, Alfred Maussner
CESifo, Munich, 2010

CESifo Working Paper No. 3311

The conditional equity premium in the model with production is often approximated by assuming a jointly log-normal distribution of the marginal rate of substitution in consumption and the marginal productivity of capital. We show that, for standard parameterization, this premium is about one third less than that implied by a non-linear approximation of the Euler equations.

CESifo Category
Empirical and Theoretical Methods
Fiscal Policy, Macroeconomics and Growth
Keywords: equity premium, log-normal approximation, production CAPM
JEL Classification: G120, C630, E220, E320