[Paper Review] Exact Value Solution to the Equity Premium Puzzle

Atilla Aras|arXiv (Cornell University)|Feb 12, 2026

Financial Reporting and Valuation Research0 citations

TL;DR

The paper derives an exact-value solution to the equity premium puzzle by computing four model parameters from four equations, yielding a time-discount factor of 0.9581 and CRRA of 1.0319, and showing CCAPM can work without calibration.

ABSTRACT

This article's aim is to provide the solution to the equity premium puzzle without using calibrated values. Calibrated values of subjective time discount factor were used in my prior derived models because 4 variables were determined from 3 different equations. Furthermore, calculated values and risk behavior determination of my prior models were compatible with empirical literature. 4 unknown variables are now calculated from 4 different equations in the new derived model in this article. Subjective time discount factor and coefficient of relative risk aversion are found 0.9581 and 1.0319, respectively from the system of equations which are compatible with empirical studies. Micro and macro studies about CRRA value affirm each other for the first time in the literature. Furthermore, equity and risk-free asset investors are pinned down to be insufficient risk-loving, which can be considered a type of risk-averse behavior. Hence it can be said that calculated values and risk attitude determination align with empirical literature. This shows that derived model is valid and make CCAPM work without calibration.

Motivation & Objective

• Motivate solving the equity premium puzzle without relying on calibrated parameters.
• Compute four unknowns from four independent equations to ensure internal consistency.
• Demonstrate that the resulting risk attitudes align with empirical literature.
• Show that CCAPM can work without calibration.

Proposed method

• Set up four equations to determine four unknown parameters.
• Solve for subjective time-discount factor and relative risk aversion (CRRA) as 0.9581 and 1.0319.
• Demonstrate compatibility of micro and macro CRRA values with empirical studies.
• Analyze risk attitudes to conclude investors are not simply risk-loving but exhibit risk-averse behavior in aggregate.

Experimental results

Research questions

• RQ1 Can the equity premium puzzle be resolved without calibrated parameters?
• RQ2 What are the exact values of the time-discount factor and CRRA that satisfy the model's four equations?
• RQ3 Do the derived values align with empirical literature on CRRA and risk behavior?
• RQ4 Does the CCAPM hold without calibration under the new four-equation solution?

Key findings

• Four unknowns are determined from four equations in the new model.
• Subjective time-discount factor = 0.9581; CRRA = 1.0319.
• Micro and macro CRRA values are affirming each other for the first time in the literature.
• Equity and risk-free asset investors are characterized as insufficient risk-loving, implying a form of risk-averse behavior in the model.
• The derived model validates CCAPM without requiring calibration.