A simple general equilibrium production economy matches moments of the value premium and equity premium. Value firms have low productivity, but will eventually produce high cash flows. The present value of these temporally distant cash flows is especially sensitive to equity premium movements....

Solutions to the equity premium puzzle should inform us about the cross-section of stock returns. An external habit model with heterogeneous firms reproduces numerous stylized facts about both the equity premium and the value premium. The equity premium is large, time-varying, and linked with...