The 6 D bias and the equity premium puzzle

  title={The 6 D bias and the equity premium puzzle},
  author={Xavier Gabaix},
Consumption growth covaries only weakly with equity returns, which seems to imply that equities are not very risky. However, investors have historically received a very large premium for holding equities. For twenty years, economists have asked why an asset with little apparent risk has such a large required return.1 Grossman and Laroque (1990) argued that adjustment costs might answer the equity-premium puzzle. If it is costly to change consumption, households will not respond instantaneously… CONTINUE READING
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