The Equity Premium in Brock's Asset Pricing Model

We use the Brock's (1982) asset pricing model to explore the equity premium puzzle that was raised by Mehra and Prescott (1985). In this paper, we have two basic points to make. First, there are parameterizations of the Brock model that have equity premia that are (1) more consistent with empirical evidence than those that were found by Mehra and Prescott; and that are (2) consistent empirical values for utility and production parameters. Second, the equity premia varies with the business cycle. The values of the equity premium that are reported in empirical research are averages over time, which means that the values have been averaged over the business cycle. However, one of the strong results from the Brock asset pricing model is that one should find that the equity premium is much higher at the bottom of a business cycle than it is at the top of the business cycle