SOLUTION TO THE EQUITY PREMIUM PUZZLE

This study provides the solution to equity premium puzzle. The new model was developed by including behavior of investors toward risk in financial markets prior studies. calculations this newly tested show that value coefficient relative aversion is 1.033526 assuming subjective time discount factor be 0.99. Furthermore, investing risk-free asset allocate negative utility for an uncertain wealth value, while those positive 1977 automatically selected as year determination risk. Since above mentioned values are compatible with existing empirical studies, they confirm validity derived