A Monetary Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles

JOURNAL OF POLITICAL ECONOMY, Vol 104 No 6, December 1996

Posted: 17 Feb 1997

See all articles by Ravi Bansal

Ravi Bansal

Duke University and NBER

Wilbur John Coleman

Duke University, Fuqua School of Business-Economics Group

Abstract

This paper develops and estimates a monetary model that offers an explanation of some puzzling features of observed returns on equities and default-free bonds. The key feature of the model is that some assets other than money play a special role in facilitating transactions, which affects the rate of return that they offer. The model is capable of producing a low risk-free rate, a high equity premium, and an average positive relationship between maturity and term premium for default-free bonds. The model's implications for the joint distribution of asset returns, velocity, inflation, money growth, and consumption growth are also compared to the behavior of these variables in the U.S. economy.

JEL Classification: E43, E44, G12

Suggested Citation

Bansal, Ravi and Coleman, Wilbur John, A Monetary Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles. JOURNAL OF POLITICAL ECONOMY, Vol 104 No 6, December 1996, Available at SSRN: https://ssrn.com/abstract=3728

Ravi Bansal

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

Wilbur John Coleman (Contact Author)

Duke University, Fuqua School of Business-Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States
(919) 660-7962 (Phone)
(919) 660-7971 (Fax)

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