The Equity Premium in Retrospect Rajnish Mehra and Edward C.Prescott NBER Working Paper No.9525 February 2003 JEL No.D91,E2,E60,G0,G11,G12,G13,H2,H55 ABSTRACT This article takes a critical look at the literature on equity premium puzzle-the inability of standard intertemporal economic models to rationalize the statistics that have characterized U.S.financial markets over the past century.A summary of historical returns for the United States and other industrialized countries and an overview of the economic construct itselfare provided.The intuition behind the discrepancy between model prediction and empirical data is explained and the research efforts to enhance the model's ability to replicate the empirical data are summarized. Rajnish Mehra Edward C.Prescott Department of Economics Research Department University of California Federal Reserve Bank of Minneapolis Santa Barbara,CA 93106 90 Hennepin Avenue and NBER Minneapolis,MN 55480 mehra@econ.ucsb.edu and NBER prescott@econ.umn.eduThe Equity Premium in Retrospect Rajnish Mehra and Edward C. Prescott NBER Working Paper No. 9525 February 2003 JEL No. D91, E2, E60, G0, G11, G12, G13, H2, H55 ABSTRACT This article takes a critical look at the literature on equity premium puzzle - the inability of standard intertemporal economic models to rationalize the statistics that have characterized U.S. financial markets over the past century. A summary of historical returns for the United States and other industrialized countries and an overview of the economic construct itself are provided. The intuition behind the discrepancy between model prediction and empirical data is explained and the research efforts to enhance the model’s ability to replicate the empirical data are summarized. Rajnish Mehra Edward C. Prescott Department of Economics Research Department University of California Federal Reserve Bank of Minneapolis Santa Barbara, CA 93106 90 Hennepin Avenue and NBER Minneapolis, MN 55480 mehra@econ.ucsb.edu and NBER prescott@econ.umn.edu