A solution to the equity premium and riskfree rate puzzles: an empirical investigation using Japanese data
The objective of the present analysis is to focus on the equity premium and risk-free rate puzzles. The Hansen and Singleton model applied to the Japanese data fails to explain the equity premium which exists between risky and secure assets, while the trading costs model can satisfactorily explain the equity premium puzzle. Furthermore, the trading costs model can predict a level of return on secure assets, so that the risk-free rate puzzle also can be solved empirically.
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