The Properties of the Equity Premium and the Risk-Free Rate: An Investigation Across Time and Countries

We examine the relationship between the equity premium and the risk-free rate over time for Group of Seven countries. We show the existence of subsample instabilities, cross-country differences, and examine whether a consumption-based CAPM model is able to explain the heterogeneity of the data when cross-country and time-series differences in technology parameters are accounted for. We demonstrate that the basic features of the equity premium and risk-free puzzles remain regardless of the sample period and the country considered. Modifications of the basic setup also fall short of providing an explanation for the puzzles. Copyright 2003, International Monetary Fund