160 R.Mehra and E.C.Prescott,The equity premium Similarly,to test the sensitivity of the results to variations in the parameter we held 8 fixed at 0.036 and u at 0.018 and varied between 0.005 and 0.95 in steps of 0.05.As increased the average equity premium declined. The test for the sensitivity of results to higher movements uses an economy with a four-state Markov chain with transition probability matrix φ/2 φ/21-φ/21-φ/2 φ/2 φ/21-φ/21-Φ/2 1-φ/21-中/2Φ/2 φ/2 1-Φ/21-φ/2φ/2 φ/2 The values of the入are入1=1+u,入2=1+u+8,入3=1+u,and入4=1+u -8.Values of u,6 and are 0.018,0.051 and 0.36,respectively.This results in the mean,standard deviation and first-order serial correlations of consump- tion growth rates for the artificial economy equaling their historical values. With this Markov chain,the probability of above average changes is smaller and magnitude of changes larger.This has the effect of increasing moments higher than the second without altering the first or second moments.This increases the maximum average equity premium from 0.35 percent to 0.39 percent. References Altug,S.J.,1983,Gestation lags and the business cycle:An empirical analysis,Carnegie-Mellon working paper,Presented at the Econometric Society meeting,Stanford University (Carnegie- Mellon University,Pittsburgh.PA). Arrow,K.J.,1971,Essays in the theory of risk-bearing (North-Holland,Amsterdam). Brock,W.A.,1979,An integration of stochastic growth theory and the theory of finance,Part 1: The growth model,in:J.Green and J.Scheinkman,eds.,General equilibrium,growth trade (Academic Press,New York). Brock,W.A.,1982,Asset prices in a production economy,in:J.J.McCall,ed.,The economics of information and uncertainty (University of Chicago Press,Chicago,IL).. Constantinides,G.,1982,Intertemporal asset pricing with heterogeneous consumers and no demand aggregation,Journal of Business 55,253-267. Debreu,G.,1954,Valuation equilibrium and Pareto optimum,Proceedings of the National Academy of Sciences 70,588-592. Donaldson,J.B.and R.Mehra,1984,Comparative dynamics of an equilibrium,intertemporal asset pricing model,Review of Economic Studies 51,491-508. Fisher,L.and J.H.Lorie,1977,A half century of returns on stocks and bonds (University of Chicago Press,Chicago,IL). Friend,I.and M.E.Blume,1975,The demand for risky assets,American Economic Review 65, 900-922. Grossman,S.J.and R.J.Shiller,1981,The determinants of the variability of stock market prices, American Economic Review 71,222-227. Hildreth,C.and G.J.Knowles,1982,Some estimates of Farmers'utility functions,Technical bulletin 335(Agricultural Experimental Station,University of Minnesota,Minneapolis,MN) Homer,S.,1963,A history of interest rates(Rutgers University Press,New Brunswick,NJ). Ibbotson,R.G.and R.A.Singuefield,1979,Stocks,bonds,bills,and inflation:Historical returns (1926-1978)(Financial Analysts Research Foundation,Charlottesville,VA)